MODULE 6

OWNERSHIP AND ORGANIZATION

Learning Objectives:
 Identify the advantages and disadvantages of the different forms of business ownership

This module provides the participants concepts of each type or class of ownership and organization an
entrepreneur can choose in starting up a business. 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.

Things to consider in selecting the best legal form of organization:

 Ownership – How many owners will there be? Will their ownership be equal?
 Management – Will the owners also manage the firm?
 Financing – How much money is needed to start or purchase the business and what sources
might provide it?
 Liability – is it desirable to separate the assets of the business from the personal assets of the
owners?
 Incentives – will the business be able to provide the incentive necessary to attract the
managerial talent needed for growth and success?
 Taxation – What legal form will minimize the total tax load imposed on the business?
 Retention of Income – which form will provide the maximum income?
 Protection – will the asset values developed in the business over time be preserved if key
persons become unavailable because of illness or death?

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 of
the business according to the terms of the partnerships agreements.

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 on 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 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 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.