Business Ownership and Organization

Objectives

• Increase participant’s awareness of different forms of business ownership, thereby,

allowing them to choose the right form of organization in putting up new business
• Help participant’s analyze the advantages and disadvantages of each form or organization
• provide participants the legal requirements of each type of ownership and organization

I. Introduction

This module provides the participants concepts of each type or class of ownership and
organization an entrepreneur can choose in starting up a business. Advantages and disadvantages
of each type of ownership and organization are discussed. Although there is no best form of
ownership in general, there may be one best form of ownership for each circumstance based on
the biases and preferences of the entrepreneur.

II. Body

Business ownership refers to the legal and financial rights an individual or group holds
over a business entity. It signifies the level of control and responsibility an owner has in
making decisions, bearing risks, and benefiting from the business's profits. Business
organization encompasses the structure and arrangement of a business entity,
determining how tasks, responsibilities, and decision-making processes are distributed
among individuals or groups. It involves designing an operational framework that aligns
with the business's goals and ensures efficiency.

Types Of Business

Sole Proprietorship
The sole proprietorship or single proprietorship is a form of business organization
initiated, organized, owned or capitalized, and managed by a single person.
As defined, the entrepreneur is the capitalist, the manager, and administrator, and
in the beginning of the business, he practically does everything for the business.

Advantages
• Easily created and terminated. The sole proprietorship can be brought into existence
without any formalities and is easily terminated.
• Direct, undiluted action. The ownership, control, and management are vested in one
person.
• All rewards to owners. The owner works for himself or herself and determines his or
her own destiny.
• Flexibility. The owner is free to adopt change readily.
• Minimum regulation and taxation. A proprietorship is generally free from control.
Disadvantages
• Unlimited liability. The owners must be prepared to satisfy business debts with their
own personal assets if the business is unable to meet its obligations.
• Capital limitations. Equity capital is limited to the assets of the owner. This can be a
serious restriction on growth and expansion.
• Perils of individual. If the owner dies or becomes seriously ill, the business is
immediately jeopardized.
• Limited skills and capabilities of the sole owner. The skills that can benefit the business
are limited to the skills and capabilities of the owner, which might not be enough for
the demands of the business.

Partnership
A partnership is an association of two or more business partners who co-own a
business for the purpose of making a profit. In a partnership, the co-owners (partners)
share the assets, liabilities, and profits, and profits of the business according to the terms
of the partnership agreement.

Types of Partners
1. General partner. A general partner is one who shares ownership and management of
the business, and is liable to the extent of his separate property after all the assets of
the partnership are exhausted.
2. Limited partners. They refer to partners with limited financial liability and they do not
take active role in the management of the firm. A limited partner is one who is liable
only to the extent of his capital contribution.
3. Silent partners. They refer to partners who do not take active participation in the
operation of the business, but they are generally known to be partners of the
business.
4. Dominant partner. They are neither active in the partnership nor they are generally
known to be associated with the business.
5. Capitalist partner. This is the type of partner who contributes money or property to
the common fund of the partnership.
6. Managing partner. This is the partner who is designated to manage the operations of
the business of the partnership.
7. Industrial partner. This is the partner who contributes his knowledge or personal
services to the partnership.
8. Secret partner. This is a partner who takes active part in the business, but is not known
to be a partner by outside parties.
9. Nominal partner or partner by estoppel. This is a partner who is actually not a partner,
but is held out or represented as a partner.
10. Liquidating partner. This is a partner who is designated to wind up or settle the affairs
of the partnership after dissolution.

Advantages

• Pooling of resources. The partnership is useful in bringing together two or more

persons who, as a group, have more business potential than as individuals. Ideas,
 managerial talent, money, and fixed assets are frequently combined to produce a
successful business.
• Ability to obtain capital. The combined financial resources of all the partners stand
behind the negotiations for business borrowing.
• Simplicity and incentive. Each partner is motivated by knowing that the success of the
partnership is in part due to his or her own efforts. This encourages the partner to
place the success of the business above their own self-interest.
• Limited regulation and taxation. A partnership, much like a proprietorship, is subject
to a minimum amount of regulation, and the partners are taxed on their own
individual incomes.

Disadvantages

• Unlimited liability. All the partners are liable for the actions of each other.
• Tenuous existence. The partnership is subject to many eventualities that may
terminate or disrupt its operation. It may be terminated by the death, insanity, or
incapacity of a partner. Furthermore, serious disagreements may be insoluble.
• Independence on management harmony and coordination. The equality of the
partners is simple in theory, but sometimes more difficult in practice. Partners may
not agree on certain matters, or division of work assignments may prove awkward.
• Problems in share liquidation. A partner’s share is not easily disposed of except by
agreement with the other partners. Attempting to dispose of a share to an outsider
without proper valuation can be a problem.

Corporation

A corporation is an artificial being, invisible, intangible, and exist only incontemplation

of law

Corporation

A Corporation is an artificial being, invisible, intangible, and exists only in contemplation

of law. Its owners are the stockholders who can sell their interests in the corporation
without affecting the continuity of its operations because the life of the corporation is
dependent or distinct from that of the owners or stockholders.

Advantages

Limited liability. The liability of a stockholder in a corporation is limited to the amount

invested in the stock.

Legal entity.The corporation is a legal entity. It may own property, but is not affected by
the death or withdrawal of its stockholders, and is entitled to due process and equal
protection under the Fourteenth Amendment of the Constitution.
Ready transferability of ownership.The shares of stock can be sold or transferred at will.

Obtaining capital. Forming a new corporation with a salable idea can provide
opportunities to sell stock to a variety of investors. Later, a corporation that has achieved
some stability can usually bargain more effectively for a substantial amount of capital
than either a proprietorship or partnership.

Employee benefits. The corporation has a better chance to create incentives for
employees. Stock ownership, bonuses, pension plans, insurance programs, and other
fringe benefits and the tax advantages that accompany such programs are more easily
provided by the corporate form of organization.

Disadvantages

Legal formality and cost. Creating a corporation may require considerable time, effort,
and expense. In addition, the corporation is subject to considerably more control and
more exacting compliance with regulations than proprietorship or partnership.

Cost and time involved in the incorporation process. In view of the relatively large
number of persons involved in forming a corporation, the cost involved and the time
requirement for the formation or incorporation registration process is somewhat longer
and difficult.

Taxation. The nature of a corporation is subject to certain tax regulations, which is more
costly from the viewpoint of both national income tax and local government tax rules.

Potential loss of control by founders of the corporation. The nature of a corporation, as

well as the boundary between the powers of the owners/founders and managers of the
business, may pose as a constraint and threat to the founders or stockholders of the
corporation.

Cooperative

Republic Act 6938, otherwise known as the Cooperative Code of the Philippines, defined
a cooperative as a duly registered association of persons, with a 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.

Principles of Cooperative

Open and voluntary membership. Membership is open to all individuals, regardless of

their social, political, racial, or religious background or beliefs.
Democratic control. Affairs of the organization are administered by personnel elected or
appointed in accordance with their approved Constitution and By-laws. Members of the
primary cooperatives have equal voting rights irrespective of the number of their capital
share of stock.

Limited interest on capital. Shared capital receives strictly limited rate of interest.

Division on net surplus. Net surplus arising out of the operations of cooperative belongs
to its members and shall be equitably distributed for cooperative development common
services, individual reserved fund, and for limited interest on capital and/or patronage
refund, as specified in the Articles of Incorporation and By-Laws.

Cooperative education. All cooperatives are mandated to make provision for the
education of their members, officers, employees, and of the general public based on the
principles of the cooperatives.

Cooperation among cooperatives. All cooperatives, in order to best serve the interest of
their members and communities, have to actively cooperate with other cooperatives at
local, national, and international levels.

Advantages and Disadvantages of Cooperatives

Tax privileges. In some government-sponsored projects,the cooperative usually receives

subsidy and other forms of privileges directed at its members.

Ability to provide direct benefits to its members and the entire community it serves in
the form of relatively cheaper products and services consistent with its mission of
providing services, rather than existence for purely profit motives.

Inequality of profit distribution. Profits are distributed according to the number of

stocks. The enterprising or entrepreneurial member of the cooperative who spent much
effort will in turn receive relatively lesser rewards as compared to the rest.

The pro-masses or pro-poor bias of the cooperatives appears diametrically opposed to

the entrepreneurs’ idea of servicing a market niche that is well-off enough to address its
dream of profit.

General requirement and procedures for registration

Prospective entrepreneur must check with the government agencies concerned for
updated or revised administrative rules and policies, as well as recent legislative
enactment that may have to be complied with.

Registering a single proprietorship

Register the business name with the Department of Trade and Industry under the Bureau
of Domestic Trade.

2 pcs. 2X2 picture

Application fee or registration fee of P110.00

Registering a partnership

Prepare partnership agreement

File the partnership agreement with the SEC

Pay filing fee

Evaluation of the application by the lawyer and staff of Corporate and Legal Department

Release of the approved registration is within 15 -30 days

Registering a corporation

Prepare Articles of Incorporation and By-laws, bank certification

File Articles of Incorporation and By-laws with the SEC

Pay registration fee

Evaluation of application by lawyer and staff of Corporate and Legal Department

Release of approved registration is within 15-30 days

Registering a cooperative

The following documents shall be forwarded to CDA:

1. Four(4) copies of the economic survey with a general statement describing briefly the
structure, purpose, economic feasibility, area of operation, size of membership, and
other pertinent data

2. Four(4) copies of Articles of Incorporation together with the bond of accountable

officers

3.Four(4) copies of By-laws

4.Registration fee as prescribed by CDA

Dealing with local government units

 The papers or documents issued by DTI, SEC, and CDA upon approval of the registration
are instruments which are national in character. After complying with the national
agencies, there is the Local Government Code which empowers the local government
units to take full administrative control of their respective jurisdiction and make
legislation, as well as ordinances (including tax/fees impositions) best fitting to the needs
of the locality. And this is where the business registrants is affected.

To be able to finally operate the business and open the doors to the public, the
entrepreneurs have to comply with all the permits and clearances imposed by the local
government units. These are the following:

1. Mayor’s permit

2. Building permit

3. Sanitary permit

4. Cigar and liquor permit

5. NBI clearance

6. Barangay clearance

Dealing with other government and private bodies

Agencies like DENR and DepEd may have to be consulted for their requirements to the
registering organization. The entrepreneur’s own neighborhood may likewise oppose a
business proposition within the village or subdivision.

How much money is needed?

There is no specific or mandatory provision in law in putting up a sole proprietorship

business. Unlike in partnership and corporation, Securities and Exchange Commission
requires a bank certification attesting to the fact that indeed, the paid up capital
requirement as indicated in the incorporation papers is deposited in the bank. Under the
law, the minimum authorized capital requirement for the corporation is one hundred
thousand pesos, and 25% of this must be subscribed, and at least 25% of the subscribed
capital must be paid up.

III. Sample Assessment: Activity

Self-Check Test

Directions: Explain the following:

1. What are the advantages and disadvantages of each form of business ownership?
2. How can young ,budding entrepreneurs compete with older, more experienced

entrepreneurs? It is enough to have a novel business idea? Explain your answer.

IV. Reference

Entrepreneurship in the Philippine setting by Winefreda B. Asor.