Differentiates the forms of business organization

Business organization is the single-most important choice you’ll make regarding your
company. What form your business adopts will affect a multitude of factors, many of which
will decide your company’s future. Aligning your goals to your business organization type is
an important step.

Liability - the state of being responsible for something, especially by law.

Your company’s form will affect:

 How you are taxed
 Your legal liability
 Costs of formation
 Operational costs

There are 5 main types of business organization: sole proprietorship, partnership, corporation,
and Limited Liability Company, or LLC.

1. Sole Proprietorship
The simplest and most common form of business ownership, sole proprietorship is a business
owned and run by someone for their own benefit. The business’ existence is entirely
dependent on the owner’s decisions, so when the owner dies, so does the business.
Advantages of sole proprietorship:
 All profits are subject to the owner
 There is very little regulation for proprietorship
 Owners have total flexibility when running the business
 Very few requirements for starting—often only a business license
Disadvantages:
 Owner is 100% liable for business debts
 Equity is limited to the owner’s personal resources
 Ownership of proprietorship is difficult to transfer
 No distinction between personal and business income

2. Partnership
These come in two types: general and limited. In general partnerships, both owners invest
their money, property, labor, etc. to the business and are both 100% liable for business debts.
In other words, even if you invest a little into a general partnership, you are still potentially
responsible for all its debt. General partnerships do not require a formal agreement—
partnerships can be verbal or even implied between the two business owners.
Limited partnerships require a formal agreement between the partners. They must also file a
certificate of partnership with the state. Limited partnerships allow partners to limit their own
liability for business debts according to their portion of ownership or investment.
Advantages of partnerships:
 Shared resources provides more capital for the business
 Each partner shares the total profits of the company
 Similar flexibility and simple design of a proprietorship
 Inexpensive to establish a business partnership, formal or informal
Disadvantages:
 Each partner is 100% responsible for debts and losses
 Selling the business is difficult—requires finding new partner
 Partnership ends when any partner decides to end it

3. Corporation
Corporations are, for tax purposes, separate entities and are considered a legal person. This
means, among other things, that the profits generated by a corporation are taxed as the
“personal income” of the company. Then, any income distributed to the shareholders as
dividends or profits are taxed again as the personal income of the owners.
Advantages of a corporation:
 Limits liability of the owner to debts or losses
 Profits and losses belong to the corporation
 Can be transferred to new owners fairly easily
 Personal assets cannot be seized to pay for business debts
Disadvantages:
 Corporate operations are costly
 Establishing a corporation is costly
 Start a corporate business requires complex paperwork
 With some exceptions, corporate income is taxed twice

4. Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with limited liability while providing
some of the income advantages of a partnership. Essentially, the advantages of partnerships
and corporations are combined in an LLC, mitigating some of the disadvantages of each.
Advantages of an LLC:
 Limits liability to the company owners for debts or losses
 The profits of the LLC are shared by the owners without double-taxation
Disadvantages:
 Ownership is limited by certain state laws
 Agreements must be comprehensive and complex
 Beginning an LLC has high costs due to legal and filing fees

5. Cooperative
A cooperative is a business or organization owned by and operated for the benefit of
those using its services. They’re common in health care, retail, agriculture, art and restaurant
industries. Profits and earnings generated by the cooperative are distributed among the
members, also known as user-owners.
Typically, an elected board of directors and officers run the cooperative while regular
members have voting power to control the direction of the cooperative. Members can
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become part of the cooperative by purchasing shares, though the amount of shares
they hold does not affect the weight of their vote.

Activity 1
Read the following carefully. Then answer and discuss the questions at the end of the
story.
Jane and Rose are best of friends working in the same agency. While they were
having their coffee break one day, Rose having three children going to school
complained to Jane how difficult to make ends meet with the meager salary they
are receiving . When Jane heard her friend, she said “why don’t you put-up a
sideline? You are a good cook. You can sell peanut adobo, brittle, peanut butter or
other food products. I am sure you will not have problems in terms of raw
materials because these raw materials are abundant in our community.
Rose is sold to the idea and persuaded her friend to be her partner. The
two friends contributed P2,000.00 each to start the business. They agreed to
have equal profit. Rose would take care of production while Jane will
concentrate in marketing.
Jane started getting orders while Rose concentrated in cooking. When they
succeeded in getting big orders they decided to register their business as a
partnership under the name R & J Food Products. From then on, their consumers
have regular orders and even becoming bigger.
After six months of operation, the partners earned P20.0000.00 and they
decide to divide It equally between them. Meanwhile, rose was exhausting herself
with her production efforts, while Jane’s life went on very casually because once the
first orders have been booked, most of the buyers placed repeated orders.
Before the business reached its first year anniversary, Rose got sick and advised
to rest.
Rose can no longer cook and Rose husbands forbade her to continue the business.

Activity 1
Read and answer the following questions about the story of R & J Food Products.
1. What went wrong with the business?
2. If you were Rose would you enter into a partnership with a friend or would
you register the venture as a sole proprietorship?
3. Were the partners right in splitting the profits equally?
4. Discuss the advantages and disadvantages of partnership.
5. If you engage into business, what form of ownership would you choose and why?

Activity 2
Select only the best answer by writing the LETTER only in your paper.

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1. The term legal form refers to the type of business ownership. Which type of
business ownership is the simplest any liability and most common?
a. Corporation c. Partnership
b. Cooperative d. sole proprietorship
2. Partnership is a business form owned by two or more persons. Which among the
choices below is NOT an advantage of partnership
a. Partners have to be consulted each time a decision and action is made.
No income tax is levied on the partnership itself but on the owners as individuals.

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