Module No.

and Title MODULE 1: Accounting and Business

Lesson No. Lesson 4: Forms of Business Organization and their Capital Structures
and Title
Learning
 Distinguish the different forms of business organizations.
Outcomes
Time Frame 1 Hour

One of the first decisions that you will have to make as a business owner is how the
business should be structured. All businesses must adopt some legal configuration
that defines the rights and liabilities of participants in the business’s ownership,
Introduction control, personal liability, life span, and financial structure. This decision will have
long-term implications, so you may want to consult with an accountant and attorney
to help you select the form of ownership that is right for you. Enjoy while learning
students as we will discuss the forms of business organization and its capital
structures.

 List at least five businesses that exist in your locality.

Activity
 Based on the given activity, determine what types of business
Analysis organizations the companies on your list belong.
Abstraction
Lesson 4: Forms and types of Business Organizations and
its Capital Structure
Forms of Business Organizations

1. Sole or Single Proprietorship - is a form of business organization, wherein a

single person owns, manages and controls, all the business activities and the
individual who operates the business is called as a sole proprietor or, a sole
trader.
 Registered with the DTI.

2. Partnership - According to Section 4 of the Partnership Act, 1932 partnership

is “the relation between persons who have agreed to share the profits of a
business carried on by all or anyone of them acting for all”. In other words, a
partnership is an agreement among two or more persons to carry on jointly a
lawful business and to share the profits arising there from.
 Formed by contractual agreement.
 Registered with the SEC

3. Corporation - is an entity recognized by law as possessing an existence

separate and distinct from its owners; that is, it is a separate legal entity.
Endowed with many of the rights and obligations possessed by a person, a
corporation can enter into contracts in its own name; buy, sell, or hold
property; borrow money; hire and fire employees; and sue and be sued. Let’s
look at a video to learn about the difference in partnerships and corporations.
 Formed by operation of Law
 Registered with the SEC

4. Cooperatives – an association of individuals who joined together to

contribute capital and cooperate in order to achieve certain goals.
  Formed in accordance with the Cooperative Code
 Registered with the CDA

Sole Proprietorship

Advantages:
 You are the boss and you keep all the profits.
 Decision making is simple because you have complete control over the
business.
 Relatively easier and less costly to form because there are fewer formal
business requirements.
 Lower extent of government regulation and relatively lower taxes.

Disadvantages:
 You assume all the risk of loss.
 You take all responsibility and rely mostly on yourself in making decisions.
 It is more difficult to raise capital because you rely mostly on your personal
assets and learn to initially finance the business.
 You are personally liable for the debts and obligations of the business

Partnership

Advantages:
 Better business decisions can be made because “two heads are better than
one”.
 You share the business risks, and the responsibility of running the business
with your partner(s).
 Compared to corporations and cooperatives, a partnership is easier to form
because only a contractual agreement between the partners is needed.
 Greater capital compared to a sole proprietorship.
 Relatively lower extent of government regulation compared to corporations.

Disadvantages:
 Making business decisions may give rise to conflict among the partners.
 You don’t keep all the profits because you need to share them with you
partner(s).
 Limited life, in the sense that partnership can be easily dissolved by the
withdrawal, retirement, death or insanity of one of the partners.
 Lesser capital compared to corporations.
 A partnership (other than a general professional partnership) is taxed like a
corporation.
 Unlimited Liability. The partners can be held liable for partnership debts up to
their personal assets.

Corporation

Advantages:
 A stockholder who is not a member of a member of the corporation's board of
directors is relieved from managerial responsibilities. Only the stockholders
that are elected as members of the board of directors and those they hire or
appoint are tasked with managerial responsibilities. This can be an advantage
because a regular investor does not need to work for the corporation to earn
income.
 Limited liability of the owners because stockholders are liable for corporate
debts only up to the amount they have invested.
  Greater capital and ease in raising additional funds because a corporation can
issue shares to a wider
 If the corporation is listed, you can easily transfer your shares to other
investors by selling them in the stock market. Many investors eam profit this
way-by buying shares at a cheap price, wait for prices to go up, and then sell
them. This activity is referred to as stock trading,
 Unlimited life, in the sense that the withdrawal retirement, death or insanity of
one of the stockholders does not dissolve the corporation.
 Although a corporation has a legal life of 50 years, this can be renewed for an
indefinite number of renewals

Disadvantages:
 Your "say" on corporate affairs depends on the number of shares you own.
Those who own more shares are the bosses and enjoy a larger share of the
corporation's profits.
 A corporation is more difficult and more costly to form because there are more
formal business requirements.
 Greater extent of government regulation and i higher taxes.
 Unlike for a sole proprietorship or a partnership where business profits are
easily distributed to the owner(s), in a corporation, you have to wait for the
board of directors to declare dividends before you can get your share in the
profits.

Cooperative

Advantages:
 Unlike in a corporation, your "say" on cooperative affairs is not affected by the
number of shares you own. This is because, in a cooperative, each member is
entitled to only one vote regardless of his or her shareholdings. However,
members with larger shareholdings are entitled to larger share in profit (net
surplus).
 A cooperative is generally exempt from paying taxes. This is the main
advantage of a cooperative and the most common reason why cooperatives
are organized. Moreover, a cooperative s may receive assistance from the
government.
 Compared to a corporation, a cooperative is easier and less costly to form
because there are fewer formal business requirements.
 Limited liability - the members are liable for cooperative debts only up to the
amount they have invested.
 Unlimited life, in the sense that the withdrawal, retirement, death or insanity of
one of the members does not dissolve the cooperative.
 Although a cooperative has a legal life of 50 years, thus can be renewed for
an indefinite number of renewals.

Disadvantages:
 A cooperative is prone to poor management. Cooperatives are, more often
than not, managed by members who were elected as board of directors rather
than by employed professional managers. Since there is a 'one member, one-
vote' policy in a cooperative, influential members tend to dominate the election
process. The result is that those who get elected may not be the ones who
are most qualified for the task.
 A cooperative is susceptible to corruption. Due to its management structure
and lack of profit motive, the elected officers may be inclined to act on their
personal interests.
  The Cooperative Code places some restrictions on the distribution of a
cooperative's profit to its members, More specifically, the Code requires a
cooperative to appropriate a portion of its annual profit to some funds. Only
the remaining portion can be distributed to the members.
 Furthermore, when the cooperative is dissolved, the amount accumulated in a
fund called the "reserve fund will not be returned to the members, but rather
donated to another cooperative or to the community.
 Compared to a corporation, it is more difficult for a cooperative to sustain
growth. This is in part because of the lack of profit motive and the lack of
management expertise. Moreover, a cooperative's success strongly depends
on the member’s cooperation and members are not always willing to
cooperate. The success of a business depends on continuing effort. Sadly,
many cooperatives are zealous at the start but fail to sustain continuing effort
resulting to the waning down of their activities.
 This does not mean though that all cooperatives are small businesses. There
are many multi-billionaire cooperatives in our country. Some might be located
in your community.
 Unlike in a corporation where the stockholder can freely transfer his shares, in
a cooperative, there are restrictions on the transfer of a member's shares. For
example, the approval of the board of directors must first be obtained before a
member can transfer his or her shares.

Nature of Business

A business firm may be classified in terms of what they offer, sell or produce. They
are as follows:

Service Concern – the business derived its income from services rendered to
clients in case of professional services, like that of Accountants, Lawyers, Doctors,
Dentists, etc., or to customers in the case of non-professional services, like that of a
hotel where room rental is the main line of their business, laundry shop, car repair
services, janitorial services, etc.

Merchandising Concern – the business is engaged in buying goods or

commodities or my form of finished products and sells them at a profit. It might be at
a retail or wholesale basis. Grocery stores are best example of this nature of
business. It also includes food and beverage sold in restaurants and related
establishments.

Manufacturing Concern – the business is engaged in buying of raw materials and

supplies to be processed or manufactured, converting them into finished products for
Sale at a profit, like that of a furniture shop, manufacturers of cars and home
appliances, etc. Bakeries and restaurants are no exceptions.

Agri-business – the business is engaged in planting of crops and sells its products
either n raw or finished form at a profit.

Hybrid Companies – are those involved in more than one type of activity which are
manufacturing, merchandising and service.

Application Multiple Choice

 1. Which of the following accounts for the least amount of the three business
types that are formed in the US?
a. Corporations
b. Partnerships
c. Limited liability companies
d. Sole proprietorships
2. The following advantages: unlimited life, ease of transfer, and limited liability
apply to _________.
a. partnerships
b. sole proprietorships
c. corporations
d. limited partnerships
3. How does an investment from investors in a corporation work?
a. They are only accountable for the amount they invest in the corporation.
b. Their investment and personal savings are both liable when they invest in
a corporation.
c. They are guaranteed their investment back in case the company goes out
of business.
d. None of these answers
4. A formal contract to repay money with interest is a ________.
a. Bond
b. Principal
c. Double taxation
d. Share
5. Which of the following is the most autonomous?
a. Partnerships
b. Limited liability companies
c. Corporation
d. Sole proprietorships

It is important that the business owner seriously considers the different forms of
Closure business organization—types such as sole proprietorship, partnership, and
corporation. Which organizational form is most appropriate can be influenced by tax
issues, legal issues, financial concerns, and personal concerns.