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MGNT 18


        Chapter 6
Ownership 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 Cooperatives
VI.     Legal Considerations in Choice of Organization
VII.    General requirements and procedures for registration
           i. Registering a Single Proprietorship
           ii. Registering a Partnership
           iii. Registering a Corporation
           iv. Registering a Cooperative
VIII.   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 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.
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 cooperative

VIII.   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.

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Ownership and organization

  • 1. MGNT 18 Chapter 6 Ownership and Organization Aizell A. Bernal BSBA 3 Mr. R. Poblete
  • 2. 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 Cooperatives VI. Legal Considerations in Choice of Organization VII. General requirements and procedures for registration i. Registering a Single Proprietorship ii. Registering a Partnership iii. Registering a Corporation iv. Registering a Cooperative VIII. The best form of ownership
  • 3. 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. 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. 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.
  • 6. 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
  • 7. 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 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.
  • 8. 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 cooperative VIII. 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.