Types of Business Organizations

ADMU-JGSOM | Financial Accounting

Also referred to as “firm”, “enterprise,” or “company”, a business is an organization formed to engage in commercial
transactions and exchange of goods and/or services with customers with the primary objective of earning profit to
increase the wealth of owners.
• A business may involve sale of goods, provision of services, or both.

Forms of Business Enterprise

A business enterprise may be classified in accordance with the nature of its business. It can be a service business, a
merchandising business, or a manufacturing business.

• A service business involves sale of services to customers. The main way of generating revenues of a service
business is through charging fees.
o An educational institution is an example. It is able to earn revenues by charging fees in the forms of
tuition fees, enrollment fees, registration fees, library fees, among others.
o Transportation business delivers service and in return, earns revenues by charging fares.
o Professional service firms earn revenues by charging professional fees. Example of these firms include
law firms, accounting firms, consulting firms, architectural and design firms, among others.

• A merchandising business involves trading of goods buy simply buying the goods and selling the same to its
customers.
o A very typical example of merchandising business is sari-sari store.
o Merchandising businesses earn revenues by imposing mark-ups in the “merchandise” they buy from
suppliers which they ultimately sell to their customers.

• A manufacturing business involves the sale of finished goods which were processed by the enterprise itself.
It involves the purchase of materials and labor, the transformation of these materials to finished goods, and the
sale of these finished products
o Food businesses are classified under manufacturing business. They buy the ingredients they will be
needing in the preparation of the food they will offer to the customer. Labor is needed to cook the food
and sell them to their customers.
o Most big conglomerates are involved in manufacturing businesses.

Legal Forms of Businesses in the Philippines

Businessmen or entrepreneurs in the Philippines have different choices in organizing their companies. Businesses in
the Philippines are formed with the jurisdiction of the Government which assigned specific agencies or
instrumentalities to oversee the work and management of Philippine enterprises. These legal forms include sole
proprietorship, partnership, and corporation.

• A sole proprietorship is a business owned by a single individual known as the proprietor. This is the most
basic legal form of business in the Philippines. Most successful businesses began as sole proprietorships.
o Sole proprietorships are the easiest to form and, at the same time, are subject to minimal regulatory
requirements.
o They are regulated by the Department of Trade and Industry (DTI).
o Decision making is straightforward. Most of the time, the proprietor himself makes the decisions to make
implementation of the decisions faster.
o Profits are at the disposal of the proprietor. At the same time, losses are all borne by the proprietor.
o Most small businesses, such as sari-sari stores, groceries, online shops, small hardware, and small
retail stores fall under sole proprietorships.

• A partnership is a more complicated legal form which is owned by several individuals, known as partners.
o Partnerships are regulated by the Securities and Exchange Commission (SEC) and are governed by
the Civil Code of the Philippines. A partnership is expounded under Article 1767 of the Civil Code as a
business formed by two or more persons who bind themselves to contribute money, property, or industry
to a common fund, with the intention of dividing the profits among themselves.
▪ The partners agree on how the business will be managed, including the capital contribution and
the distribution of profits among them.

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 ▪ Minimum number of partners, or owners of a partnership business, is two (2).
▪ Decision making is centralized among the partners. A partnership business can be easily
dissolved. This may happen through agreement, withdrawal, death of a partner, or incapacity
of a partner.
▪ Profits are divided among the partners according to their agreement. Losses are also divided
among them according to their agreement. Partnership liabilities, however, may be extended to
each partner, except if he or she is designated as a limited partner.
▪ General Professional Partnerships, or partnerships for the exercise of profession, are exempt
from income tax. General Partnerships, meanwhile, are taxable as a corporation.

• A corporation is the most complex legal form of business ownership in the Philippines and is owned by so-
called stockholders or shareholders.
o Corporations are also regulated by the Securities and Exchange Commission and are governed by
Republic Act No. 11232 or the Revised Corporation Code. Under Section 2 of RA 11232, a corporation
is an artificial being created by operation of law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or incidental to its existence.
▪ The management of a [private] corporation is vested upon the Board of Directors. However,
relevant corporate decision shall be voted by the majority or a specific proportion of the
stockholders with voting rights, or by the Board of Directors, as provided by the law.
▪ Minimum number of stockholders is two (2), except for corporations classified as “one person
corporation” (OPC).
o Corporations, being the most complex form, are subject to the most regulatory requirements. A
corporation may only perform the duties necessary to the purposes it provided in its Articles of
Incorporation (AOI) and By-Laws, and those which are incidental to its existence. Any act which is
outside the proprieties of its AOI and by-laws is generally considered invalid.
o A corporation has the greatest capacity to raise capital through issuance or sale of shares of stock to
the public (once a corporation becomes publicly listed).
o Profits of a corporation shall be distributed to the stockholders by way of dividends. Some portion of the
profits may also be used for future planned expansion, investment, or the likes by retaining the earnings.

• Other legal forms of businesses or transactional medium in the Philippines include Joint Ventures (regulated by
the SEC and governed by either the Law on Partnership or Law on Corporations), Cooperatives (regulated by
the Cooperative Development Agency and governed by Republic Act No. 9520) and Nonstock Corporations
(regulated by the Securities and Exchange Commission and governed by Title XI of the Revised Corporation
Code). A cooperative and a non-profit entity, however, are generally not-for-profit institutions and do not have
the primary objective of earning and maximizing the wealth of their owners.

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