Lesson 2.

Forms of Business Organization

Introduction
Daniel wants to build a water refilling business. For the past two years, he has been saving extra
money from his allowance for his starting capital. However, after calculating his savings, he realizes
that it is not enough to build his dream business. It turns out that he still needs Php 50,000 to
complete the financial requirements. His friend, Gian, o ffered to help. He wants to fund the
remaining needed capital provided that he will be a co-owner of Daniel’s business. If Daniel accepts
Gian’s proposal, how will this affect the business?

As an ABM student, you most likely want to build a business on your own, just like Daniel. It is
vital to consider the form of business you will build in the future. You have to consider how many
co-owners you want to have, what products and services you are going to o ffer, and how much
capital you will need. This information will indicate the form your organization will take.

Learning Objectives DepEd Learning Competency

At the end of this lesson, you should be able to
In this lesson, you should be able to do the following:differentiate the various forms of business organizations
(ABM_AOM11-Ic-d-9).
● Identify the different forms of
business organizations.
● Enumerate the characteristics of
each form of business organization.

1
Discover

As you start your business venture, it is very significant to know what form of business organization
you will establish. This is one of the crucial steps that should be taken carefully. The way your
business is formed or structured is a factor in determining your business venture’s success. Before
establishing your business venture, you have to ensure that you fully understand the ownership
structure, the degree of risks, the business registration process and costs, and the government
regulations you need to follow.

Why do business owners need to select the form

of business organization they will establish
carefully?

According to Ownership Structure

Businesses differ based on ownership structure or the number of owners or investors a business has.
The various business structures have implications on the degree and scope of responsibility and the
financial flow.

Sole Proprietorship
In a sole proprietorship, the business is owned by one person with complete control and authority
over the entire business. This owner is known as a sole trader or an individual entrepreneur. It is
the simplest and easiest form of business organization to establish. Most of the small businesses in
the Philippines are under sole proprietorship.

Here, the owner and business are not legally separate concepts. The business is considered to be an
extension of the owner, unlike other forms of business organizations. Hence, the owner faces
unlimited liability—he is personally responsible for unfortunate events in the business, such as debts,
personnel issues, or customer complaints.

A sole proprietorship has the following advantages and disadvantages:

Advantages:
● Ease and cost of formation – Unlike other business organizations that require large fees and
a complex registration process to operate, forming a sole proprietorship is comparably easier,
less complicated, and less costly. Sole proprietorships often only require business permits that
can be applied at the local municipal hall.
 ● Distribution of profits or earnings – One hundred percent of the profits goes to the owner
since it is not shared with partners or co-owners.

● Control of the business – The owner has complete control over all business-related decisions
instead of sharing authority with a partner or a board of directors. Having direct control gives
sole proprietors the freedom to guide the business in any direction or way they want.

● Tax benefits – The sole proprietor's net income is considered a personal income of the owner.
Instead of filing a separate tax return, sole proprietors claim businesses' gains and losses on
their tax returns. Unlike other business organizations, net incomes are taxed and subjected to
taxation again when the owners individually receive their profits.
Fig. Sari-sari stores are common sole-proprietorships in
the Philippines.Disadvantages:
● Unlimited liability – If the business cannot
pay its debts and liabilities, the owner's assets
will be affected. For example, if you will be
bankrupt and owe your creditors Php
1,000,000, then that amount will have to come
out of your pocket or savings even if there are
no resources or money left in the business.

● Raising capital and additional investments will be di fficult – In a sole proprietorship, the
desire to increase investments and capital depends on the owner's financial resources and
capability. Although sole proprietors can borrow or request a loan, it is still difficult because
the amount of money to be borrowed will depend on their ability to pay.

● Lack of business continuity – Business continuity ends with the death or departure of the
owner. If the sole owner dies or becomes incapacitated, the business’s overall operations will
be significantly affected. Hence, the death or ill-health of the owner will mean liquidation of
the business.

● Difficulty in attracting good employees – Because of the limited operations of a sole

proprietorship, many good applicants have a mindset that this business organization will not
survive for a long time. Hence, these applicants will apply instead to more stable and large
companies with a well-established reputation.

Partnership
A partnership is a form of business organization wherein two or more individuals share the
ownership. The owners of this kind of agreement are usually called partners. The profit or loss that
results from the business operation is divided between or among the partners. The partners also
mutually agree as to how they will make decisions. Generally, there are two types of partnership:
general and limited.

In a general partnership, all partners are considered general partners liable for the partnership debts
up to their personal property. On the other hand, there should be at least one general partner and at
least one limited partner in a limited partnership. The liability of a limited partner is only up to his
actual contribution or investment in the partnership. Personal assets and properties of limited partners
will be protected if the partnership has some financial obligations to pay.

Specifically, a partnership can be classified in many ways. Based on the actual contribution, partners
can be capitalist and industrial. A capitalist partner only contributes money or property, or both to
the partnership as his investment. Industrial partners only contribute their knowledge, expertise, or
personal service to the partnership. They do not have contributions in the form of money or property.
Their profit share is based on what is considered fair and equitable.

As specified by the public knowledge, partners can be ostensible and secret. An ostensible partner
is known to the public as an owner of the business. Ostensible partners are also known as active
partners. This partner takes active participation in managing and running the partnership. A secret
partner also participates in managing the business, but the public is not aware that he/she is involved
in the partnership.

Fig. 2. Types of Partners

Based on the owner's connection or interest, partners can be real or nominal. A real partner
devotes his time and effort to managing the partnership as he is connected to the business. He actively
participates in the affairs of the partnership. A nominal partner does not have any interest or
connection in the business. However, he lends his name or reputation to the firm without any money
or capital investments and does not share the business profits. He is a partner in name only. He is also
referred to as a partner by estoppel. This partner's purpose is to lend his established credibility and
recognition to the firm.
Advantages of Partnership:
● More significant sources of capital – Because there are two or more owners, the business
will generate more capital and investment than a single proprietorship.

● Losses are shared among partners – If the business files for bankruptcy and has incurred
losses to its creditors, losses will be shared among partners.

● Shared responsibility and management capability – Partners are both authorized to make
decisions in managing the business. Therefore, they are also both liable for the consequences
of all organization endeavors.

● Varied skills and decision-making – Partners can offer their different skills and abilities in
managing the business. During decision-making, partners help each other to solve problems.
More partners mean more brains that generate additional ideas.

● Juridical personality – Under the Philippine laws, the partnership becomes distinct and
separate from the owners. This means that the partnership is treated and can act as an
individual. It can own a property, transact business deals, incur obligations, and commit
violations under its name. Any act of the partnership will not reflect the reputation of its
owners or partners.

Disadvantages of Partnership:
● Limited life – A partnership can be easily terminated or dissolved by even a small change in
partners' agreement. The reasons for the dissolution of the partnership can include the death of
one of the partners, admission of a new partner in an existing partnership, personal insolvency
of one of the partners, and permanent withdrawal of the investment of a partner.

● Difficulty in transferring ownership – Because partnership initiatives are regulated by

written contract or agreement, and mutual trust and confidence among members are the
foundation of the partnership, any transfer of ownership should be strictly approved and
authorized by all partners. Without the consent of other partners, no partner can sell any
portion of their ownership or investment to any individual.

● Profit will be divided among members – In a partnership, profit will be distributed among
the partners. Unlike with sole proprietorship, all of the profits will be obtained by the sole
owner.

● Disagreement among partners: One of the disadvantages of having numerous partners is

disagreement. It is inevitable for partners to have conflict, especially when they have different
opinions and decisions.
It is important to note that despite partnership businesses sharing responsibilities amongst owners,
general partners still face unlimited liability. For instance, if the business incurs several financial
losses and its assets are not enough to pay creditors, the general partners are personally liable to the
said obligations. Creditors can claim up to the extent of their assets or property. If one partner does
not own assets or properties, the second partner's assets will be seized to recover the remaining
amount of money.

Corporation
A corporation is a form of business organization that has a legal entity separate and distinct from its
owner, commonly known as juridical personality. The business is treated like an individual with
benefits from certain rights, and responsibilities and obligations. For this reason, a corporation can
enter into contracts, own or dispose of properties, secure loans, sue or be sued, hire employees, and
pay taxes in its name.

A corporation can have a minimum of five and a maximum of fifteen owners or shareholders, which
elect a board of directors who oversee the management and major decision-making of the
corporation. Ownership of shareholders in a corporation is divided into shares of stocks. The total
shares of the company stock that shareholders may acquire will depend on the capital they have
invested in the company. The profit of shareholders is based on the number of shares they have
acquired.

Corporations are strictly regulated by the Corporation Code of the Philippines (RA 11232) and the
Securities and Exchange Commission (SEC). The shareholders of a corporation are also registered
with the SEC. The minimum capital requirement for a corporation to be established is Php 5,000.
Corporations can operate or exist for not more than 50 years and are subject to extension.

Fig. 3. The Securities and Exchange Commission logo

Partnerships and corporations may have similar characteristics. Below are the key di fferences
between partnerships and corporations.

Table 1. Differences between a partnership and a corporation

Differences Partnership Corporation

 Manner of Creation It is created by the agreement of It is created by the operation of law.
the partners.

Number of Owners It may be organized by only two It requires at least five persons to
people. establish.

Management Capability Management capability is vested Management capability is vested to

in all partners. the Board of Directors.

Right of Succession Death, withdrawal, or Death, withdrawal, or incapacity of

incapacity of partners a shareholder does not affect the
dissolves the partnership corporation's existence.
agreement.

Liability It has unlimited liability (general It has unlimited liability.

partners) and limited liability
(limited partners).

Transfer of Ownership A partner cannot transfer his or A shareholder can transfer his or her
her investment without the shares to other persons without the
consent of all partners. consent or approval of other
shareholders.

Owners or shareholders of a corporation can maximize the following advantages or benefits:

● A greater source of funds – A larger amount of capital and investment can easily be raised
because of numerous shareholders’ existence or issuance of shares of stocks in public.
● Limited liability – Shareholders have limited liability. It means that creditors cannot claim
their assets and properties if the corporation has incurred several financial losses and
obligations.
● Transfer of ownership – Shareholders can transfer or sell their shares of stocks to anyone
without the approval of other shareholders.
● Continuity of existence – Corporation can continue its operations regardless of death,
incapacity, or insolvency of a shareholder.

● Management is centralized – There will be greater or more efficient management within the
corporation because management capability is vested to the Board of Directors.
 Fig. 4. The basic organizational structure of a corporation

Despite the benefits, corporations also o ffer some disadvantages:

● Complicated process in forming and operating the business – To establish a corporation,
individuals undergo a tedious and complicated process of business registration and lots of
paper works and legal documents.

Fig. 5. The business registration process of a corporation

 ● High cost of formation and maintenance – The formation of a corporation is quite
expensive compared to partnership and sole proprietorship.

● Strictly regulated by the government and laws – Because of its more extensive operating
capability, corporations are regulated or monitored by numerous government agencies and
legislation.

Corporations can be classified based on purpose, nationality, and extent of membership. Focusing on
their purpose of existence, corporations can be for-profit or nonprofit. For-profit corporations are
organized for a private aim or to earn a profit. They are subject to taxation. Nonprofit corporations are
established or formed to serve the public good. Because of their aim, nonprofit corporations are
exempted from taxation.

We can also categorize corporations based on the nationality or the country of their operations.
Domestic corporations operate under the laws of the Philippines, while foreign corporations are
organized under the law other than those of the Philippines. Lastly, corporations can be grouped
according to the extent of membership or their willingness to accept additional shareholders. Open
corporations are open to anyone who wishes to become a shareholder. In contrast, close corporations
are limited to selected persons or family members not exceeding 20 persons.

Fig. 6. Types of Corporation

 Check Your Progress
Why is it important to consider the number of owners before you establish
your business venture?

According to Business Activities

Businesses come from various industries. Business enterprises can be classified by the type of
business activities they perform or the products and services they o ffer.

Service Business
These businesses focus on providing assistance, help, and support to their clients. A service is a
nonphysical or intangible product. Because of its nature, a service business is measured in terms of
quality, appeal, and treatment received by customers.

Table 2. Types and examples of service businesses

Type Example

Hospitality services hotels, travel and tours agencies

Repair services car repair, computer repair, shoe or bags repair

Lifestyle-related services beauty salons, wellness centers, laundry shops

Education and Training services schools, tutorial services, review centers

Rental services internet shops, car rental

Professional services medical and dental clinics, accounting services,

management consultancy, engineering services,
recruitment agencies
Manufacturing Business
Manufacturing businesses convert inputs into finished goods or products. These inputs are also
referred to as factors of production. These include manpower (employees), material (raw materials
or ingredients), machines (equipment and technology), and method (production process).

Manufacturing businesses are not limited to furniture shops, food and beverage companies, assembly
factories, and garment or fashion companies.

Merchandising Business
Merchandising businesses purchase products from other businesses and sell them to customers at a
higher price. These businesses do not alter the form of the original products. They simply buy the
items from a manufacturer and resell them.

There are three types of merchandising business:

● Store-based merchandising: sari-sari stores, convenience stores, supermarkets, department
stores
● Online merchandising: e-commerce apps, social media selling
● Non-store merchandising: subscription catalogs, television home shopping, vending
machines, direct selling

Fig. 7. Merchandising businesses earn profits through reselling

Hybrid Business
Hybrid businesses have the combined characteristics and nature of service, manufacturing, and
merchandising businesses. Here, the owners produce and sell products at the same time. A very
common example of a hybrid business is a restaurant or fast-food chain. Restaurants have the
characteristics of a manufacturing business (cooks and transforms foods) and service business.

According to Asset Size

In the Philippines, businesses, whether sole proprietorship, partnership, or corporation, can be
classified according to their asset size and number of employees. Specifically, Republic Act 9178,
otherwise known as the Barangay Micro Business Enterprises (BMBEs) Act of 2002, provides a basis
for categorizing these businesses.

To promote the establishment and development of microbusinesses, the government provides

incentives, such as income tax exemption, exemption from the coverage of the Minimum Wage Law,
financial assistance, marketing assistance, production and management training, technology transfer,
and lesser charges or exemption from local taxes and fees.

Table 3. RA 9178 Business classifications

Category Asset Size Number of Employees

Micro-enterprises Up to Php 3,000,000 1 to 9 employees

Small enterprises Php 3,000,001 to Php15,000,000 10 to 99 employees

Medium enterprises Php 15,000,001 to Php 100,000,000 100 to 199 employees

Large enterprises Php 100,000,001 and above 200 and above employees
 Check Your Progress
Why do some organizations opt to be a hybrid business?

Wrap-Up

● Business organizations can be classified according to their ownership structure and asset
size. Each form has advantages and disadvantages for the business owner.
● According to its ownership structure, businesses are classified as a sole proprietorship,
partnership, and corporation.
○ Sole proprietorship is owned by only one person, an entrepreneur who has full
control and authority over the business.
○ Partnership pertains to two or more individuals called partners, sharing the
 ownership of the business and its finances.
○ Corporation has a legal entity that is separate and distinct from its owner. The
owners are known as shareholders.
● The form of a business can have a significant impact on how it is operated and maintained.
Form Advantages Disadvantages

Sole ● East and cost of formation ● Unlimited liability

proprietorship ● Distribution of profit ● Difficulty in raising funds
● Direct control to business ● Lack of business continuity
● Tax benefits ● Difficulty in attracting
employees

Partnership ● More sources for capital ● Limited life

● Shared responsibilities
and losses
● Varied skills and decisions
● Juridical personality
● Unlimited liability
● Difficulty in transferring
ownership
● Divided profits
● Disagreement among partners

Corporation ● Greater sources of funds ● Complicated to form and

● Limited liability operate

● Transfer of ownership ● High costs of formation

● Continuity of existence ● Strict government regulation
● Centralized management

● Business organizations can also be classified according to their business activities,

products, or services offered to the market:
○ Service business focuses on providing assistance to help and support its clients.
○ Merchandising businesses purchase products from other businesses and sell them
to customers at a higher price.
○ Manufacturing business converts inputs into finished goods or outputs
○ Hybrid business has the combined characteristics and nature of other business
organizations.
● Republic Act 9178 or the Barangay Micro Business Enterprises (BMBE's) Act of
2002 provides a basis for the categorization of business enterprises according to their asset
sizes and the number of employees. Below are the RA 8178 business classifications:
○ Micro-enterprise has an asset size of not more than Php 3,000,000 and has 1 to 9
 employees.
○ Small enterprise has an asset size of Php 3,000,001 to Php 15,000,000 and a
maximum of 99 employees.
○ Medium enterprise has Php 15,000,001 to Php 100,000,000 asset size and a
maximum of 199 employees.
○ Large enterprise has Php 100,000,001 and above in assets and more than 200
employees.

Try This!

A. True or False. Write True if the statement is correct. Otherwise, write False.

1. Manufacturing involves the process of reselling goods at a higher price.

2. There is a greater source of funds and capital in a partnership

compared to a sole proprietorship.

3. There is no minimum capital requirement to form a corporation here in the

Philippines.

4. There should be at least one general partner if you want to establish a

partnership.

5. The death or ill-health of the sole proprietor will mean liquidation of the
business.
6. The main government regulatory body for a sole proprietorship is the
Department of Trade and Industry,
7. A partnership may exist for a maximum of 50 years.
8. Services are intangible and nonphysical forms of products.
9. Business organizations can also be classified according to their asset size and
number of employees.
10. One of the features of a corporation is unlimited liability.

B. Identification. Identify the term or phrase being described in each item.

1. It is the main government or regulatory body for partnerships and

corporations.
2. This term is described as the ownership of shareholders in a
corporation.
3. These corporations are established to serve the public good.
 4. These service business categories can include hotels, travel agencies,
and tour guides.
5. They are vested with management capability to oversee and make
decisions for the corporation.

Challenge Yourself

Short-Response Essay. Answer the following questions. Write your answers in the space provided.
The rubric at the end of the lesson will be used in grading your work.

1. How does having limited liability benefit a corporation?

2. Why should the government maximize the presence of micro, small, and medium enterprises?

3. Why is there a need for the government to regulate the formation and registration of business
organizations?