MGNT 18 Chapter 6Ownership and Organization Aizell A. Bernal BSBA 3 Mr. R. Poblete
Outline I. The Organizational Vehicle II. The Sole Proprietorship i. Advantages ii. Disadvantages III. Partnership i. Types of Partnership ii. Advantages iii. Disadvantages IV. The Corporation i. Advantages ii. Disadvantages V. The Cooperative i. Advantages ii. Disadvantages iii. Types and Categories of CooperativesVI. Legal Considerations in Choice of OrganizationVII. General requirements and procedures for registration i. Registering a Single Proprietorship ii. Registering a Partnership iii. Registering a Corporation iv. Registering a CooperativeVIII. The best form of ownership
I. The Organizational Vehicle Before a business can open its doors to the buying public, there has to be a vehicle by which products and services can be bought or availed of from the entrepreneur. Such vehicle or organization has to be registered, authorized or licensed to transact business with the buying public. The entrepreneur has the choice as to which organizational vehicle he or she would like to establish or organize to be able to pursue his business.II. The 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. The entrepreneur id the capitalist, the manager, administrator and in the beginning of the business, he does everything for the business. Advantages of Sole Proprietorship 1. Simple to organize – A decision of the entrepreneur or business owner can lead to a quick organization or registration of the business. 2. Low start-up capital – There is no law that sets a minimum level of capital requirement to put up or establish a single proprietorship business. 3. Owner owns all profits – All the profits accrues to the owner/entrepreneur as he or she is not bound by any rule or government regulation to share his profits to anybody. 4. Total decision making authority – A single proprietorship business is run by its owner as his own, hence, the decision making function totally rests upon the hands of the owner/entrepreneur. 5. Easy to discontinue – A proprietorship is easy to dissolve or discontinue the business. It is purely a prerogative of its owner. 6. Good tax privileges – Tax matters and other regulatory requirements favor the sole proprietorship over other forms of business organization. Disadvantages of Sole Proprietorship 1. Unlimited personal liability – The context of unlimited personal liability is probably the single greatest disadvantage of a sole proprietorship; that is, the sole proprietor is personally liable for all the debts of the business. 2. Limited skills and capabilities of the sole owner – The skills that can benefit the business is limited to the skills and capabilities of the owner which might not be enough or sufficient for the demands or needs of the business. 3. Limited access to capital – A single proprietorship has a limited access to capital as compared with partnership or corporation.
4. Lack of continuity for the business – The death of the owner of a single proprietorship technically means the death of the business also.III. 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 share the assets, liabilities, 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 Partner – They refer to partners with limited financial liability and they do not take active role in the management of the firm. 3. Silent Partner – Silent partners are those not taking active role in the operation of the business but are generally known to be partners of the business. 4. Dominant Partner – They are neither active in the partnership not they are generally known to be associated with the business. 5. Capitalist Partner – A partner who contributes money or property to the common fund of the partnership. 6. Managing Partner – The partner who is designated to manage the operations of the business of the partnership. 7. Industrial Partner – The partner who contributes his knowledge of personal services to the partnership. 8. Secret Partner – 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 – A partner who is actually not a partner but is held out or represented as a partner. 10. Liquidating Partner – A partner who is designated to wind up or settle the affairs of the partnership after dissolution. Advantages of Partnership 1. Easy to establish – Because only two or more can form a partnership, it can be said that relative to a corporation, a partnership is easy to organized or established. 2. Complementary skills of partners – Like the corporation, the skills of the partners can be exploited to the fullest to the benefit of the partnership. 3. Division of profits – There are no restrictions on how profits will be distributed as long as they are consistent with the provisions of the partnership agreement. 4. Large pool of capital – The capital base of the partner can be availed of thus a form of advantage compared to proprietorship.
5. Ability to attract limited partners – Depending on the provisions of the partnership can attract as many partners as possible for the benefit of the partnership. 6. Little governmental regulation – Like the sole proprietorship, the partnership form of business operations is not burned with red tape or subject of stringent regulations unlike the corporation. 7. Flexibility – Although not as flexible as the sole proprietorship, the partnership can generally react quickly to changing. Disadvantage of Partnership 1. Unlimited liability of at least one partner – At least one of every partnership must be a general partner and he/she has unlimited personal liability, even though he or she often is the partner with least resources. 2. Difficulty in disposing of partnership interest without dissolving the partnership - To be able to justly and fairly distribute the assets of the partnership, any of the partners has to sell his interest to remaining partners which might be disadvantageous to him. 3. Lack of continuity – Complication arise when one of the partner dies. Partnership interest is often in transferable through inheritance because the remaining partners may not wish to be in association or partnership with the person who inherits the interests of the deceased partner. 4. Potential for personality and authority conflict – Friction may arise among partners is inevitable and difficult to control. Disagreement as to what should be done or what was done has been the reasons for the dissolution of many partnerships.IV. The Corporation A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Compared to sole proprietorship or partnership, a corporation is more complex of the three major forms of business ownership. Corporations are not only for big organizations but also for small business as well. Advantages of Corporation 1. Limited liability of the stockholders – The liability of the stockholders or owners of the corporation is limited to the assets of the corporation. 2. Ability to attract capital – As a prospective borrower from the bank or other financial institutions, a corporation is more welcomed or preferred as compared to single proprietorship or partnership. 3. Transferable ownership – Stock owners or stockholders of the corporation can easily affect transfer of ownership without affecting the operations of the business.
4. Larger pool of skills, expertise, and knowledge – Stockholders particularly those forming part of the Board of Directors or in the management team are rich sources of skills and expertise which can be tapped by the corporation to achieve its corporate agenda. Disadvantages of Corporation 1. 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. 2. Taxation – The nature of corporation is subject to certain tax regulations, which is more costly from the viewpoint of both national income tax and local government tax rules. 3. Legal restrictions and regulatory red tape – The administrative and legal processes that a corporation goes through in the conduct of its business pose as burdensome and source of irritation to small-scale corporations. 4. 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 constraint and threat to the founders, or stockholders of the corporation.V. The Cooperative Republic Act 6938, 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. Fabian Abella, one of the pioneering authors on cooperatives, identified the set of universally accepted principles of cooperatives includes as follows: 1. Open and voluntary membership – Membership in cooperative is a voluntary and available to all individuals regardless of their social, political, racial or religious background or beliefs. 2. Democratic control – Cooperatives are democratic organizations wherein their affairs are administered by personnel elected or appointed in accordance with their approved Constitution and By-laws. 3. Limited interest on capital – Share capital received strictly limited rate of interest. 4. 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.5. 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.6. 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 The advantage of the cooperative as the entrepreneur’s organizational vehicle is the tax privileges that the government usually provides amongst cooperative organizations. The cooperative usually receives some kind of subsidy and other forms of privileges directed at its members. The cooperative can also source its stocks or inventories from suppliers who offer concessionary terms to cooperatives. The greatest advantage of a cooperative as a business is the ability to provide direct benefits to its members and the entire community it serves in the form relatively cheaper products and services consistent with its mission of providing services rather than existence for a purely profit motives. The disadvantage in using cooperative as an organizational vehicle is its inequality of profit distribution with the same returns to all members including those who did not spent much efforts for it.Types and categories of Cooperatives1. 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.
VI. Legal consideration in choice of organization In deciding what type of business organization to register, certain factors have to be considered. The vital factors that need to be seriously taken in account are as follows: 1. Initial capital – New business venture within the ability of the entrepreneur to capitalize can be a major influence as the entrepreneur may opt for the bias of doing it by himself to rake all the benefits of the venture. 2. Taxation and government regulations – The initial choice of legal form may not be influenced greatly by problems include under this category. Taxation and regulations become more important. A factor that may even force its owners to consider shifting or changing to other legal forms. 3. Exploitation – People, time, money and products can all be exploited under the right circumstances, and a variation in legal form may be useful for this purpose. 4. Growth, expansion, merger and sale – Any of these factors may demand a shift to another legal form. In fact, a change is often mandatory to achieve the full value of the proposed course of action.VII. General requirements and procedures for registration The general procedures and requirements for the registration of business organizations covering single proprietorship, partnership, corporations, and cooperatives must be emphasized that prospective entrepreneurs must check with the government agencies concerned for updated or revised administrative rules and policies as well as recent legislative enactments that may have to be complied with. Registering a single proprietorship Registering a partnership Registering a corporation Registering a cooperativeVIII. The best format of ownership The summary of the pros and cons of various forms of business organization should give the prospective entrepreneur the chance to evaluate his options. After reading and carefully analyzing the pros and cons of the various forms of business organization as to what ownership, a question as to what form of business organization is the best to adapt. In choosing a form of ownership, entrepreneurs must remember that there is no single “best” form of business organization as to ownership.