Study Guide in GEE 2 – The Entrepreneurial Mind Chapter 7

CHAPTER 7

FORMS OF BUSINESS OWNERSHIP

MODULE OVERVIEW

This module will focus on the three different forms of business ownership, namely, Sole
Proprietorship, Partnership, and Corporation. Particularly, this module will discuss the properties or
characteristics of each of these forms of business ownership. Consequently, the advantages and
disadvantages of each form will also be examined. Finally, this module will also identify the other
ways in which an entrepreneur could start a business.

MODULE LEARNING OBJECTIVES

At the end of this module, students should be able to do the following:

1. Enumerate the different forms of business ownership
2. Analyze the differences among the various forms of business ownership
3. Identify the advantages of each form of business ownership
4. Identify the disadvantages of each form of business ownership
5. Examine the other ways on how entrepreneurs could start a business.

LEARNING CONTENTS (FORMS OF BUSINESS OWNERSHIP)

An entrepreneur who is starting a new business has to decide which form of ownership is best
for him/her and for the type of business that the entrepreneur will try to operate. In general, there are
three different forms of business ownership:
1. Sole Proprietorship
2. Partnership
3. Corporation

SOLE PROPRIETORSHIP

The word sole means ‘single’ or ‘one’, while proprietor means ‘owner’. Therefore, sole
proprietorship is a business owned and operated by one person. It is the easiest and the most popular
type of business ownership. In fact, approximately 76 percent of all businesses in the U.S. are sole
proprietorships.

A. Advantages of Sole Proprietorship

Organizing a business as a sole proprietorship has several advantages. The most important
advantage is having a complete control over business, especially in terms of making important
decisions and for day-to-day operations. Aside from the freedom and control over your business, this
form of ownership also has other advantages, as enumerated below:

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1. Easy and Inexpensive Set-Up

A sole proprietorship is the easiest and most inexpensive form of business organization to set
up. This is because only a minimal amount of documentation is required by the local and state
governments to allow its operation.

2. Least regulated type of ownership

Among the three different forms of business ownership, the sole proprietorship is considered
as the least regulated. This means that there are only few government regulations that the
business has to comply.

3. Profits Taxed Once

A business organized as a sole proprietorship does not pay income taxes as a company. But,
the entrepreneur, as the owner, should declare the profits of the business in their personal
income tax return. If the entrepreneur operates his/her business full-time, any profits that
he/she will make will be counted as taxable income.

4. Profits to Owner

In exchange for assuming all the responsibility, the entrepreneur/ owner will received all the
income earned by the business. This means, as the business grows and becomes more
successful, the owner will receive higher profits.

5. Total Control

As a sole proprietor, you have all the freedom to run your business as you wish. In contrast to
the other forms of ownership, sole proprietorship will not require the owner to convince and
communicate with other individuals like partners and stockholders.

B. Disadvantages of Sole Proprietorship

While sole proprietorship proves to have several advantages, it also has several drawbacks or
disadvantages.

1. Limited Capital

When you start a sole proprietorship, the only source of working capital, besides your own
money, is the money that you borrow. This implies that the amount of the cash available
may be limited. As we all know, insufficient amount of working capital could result in serious
difficulties in operating and expanding the business.

2. Unlimited Liability

A major disadvantage of a sole proprietorship is that if your business is not successful, you
are responsible for all losses. Unlimited liability is a situation in which the owner of the
business is responsible to pay the business debts out of personal assets. For example, if
your business is unsuccessful, you could lose your car, home, savings, and other assets
just to pay off your liabilities.

3. Limited Human Resources

The operations and expansion of the business is limited to the skills, knowledge, and
experience of the sole proprietor. In addition, the entrepreneur cannot rely on other
individuals to help carry the workload.

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4. Limited Life

A sole proprietorship has a limited life, a situation in which a business’s life span or existence
is determined by the owner’s life span or the owner’s decision to terminate the business.

PARTNERSHIP

A Corporation is a type of business ownership in which two or more people share the assets,
liabilities, and profits. Partners as co-owners agree voluntarily to operate the business for profit. When
a partnership is formed, the partners sign a special legal agreement called the partnership agreement.
A Partnership Agreement is a written document that states how the partnership will be organized.
All partners must agree to the conditions stated in this agreement, including their agreement regarding
the division of profits, losses, and responsibilities. The purpose of this written document is to prevent
later disagreement among the partners.

TYPES OF PARTNERS
1. General Partners: A partnership in which all partners have unlimited personal liability and
take full responsibility for the management of the business.
2. Limited partners: A partnership in which the partners’ liability is limited to their investment.
Also, this limited partner does not take an active role in decision making or running the
business.
3. Joint venture: A partnership in which two companies join to complete a specific project. The
partnership ends after a specified period of time.
4. Strategic alliance: A partnership in which two businesses work together for mutual benefit.
(Example: A business type partnership with a manufacturer that agrees to produce the
business’s products.)

A. Advantages of Partnerships
Many of the advantages of a partnership are similar to the advantages of a sole proprietorship;
it is easy to set-up and is taxed once. However, instead of being the only decision maker, you
would share decision making with your partners. Thus, more people can generate more ideas and
more capital. The advantages of partnership are enumerated below:
1. Shared decision making and management responsibilities.
2. Easier to raise capital than in a sole proprietorship.
3. Few government regulations.
4. Business losses are shared by all partners.
B. Disadvantages of Partnerships
1. Partnerships may lead to disagreements.
2. Some entrepreneurs are not willing to share responsibilities and profits.
3. Shared profits
4. Unlimited liability

CORPORATION

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A Corporation is a type of business ownership that is chartered by a state and legally operates
apart from its owners. This means, a corporation is a business organization that operates as a legal
entity that is separate from its owners and is treated by law as if it were an individual person. The
ownership of a corporation is divided into units, which are called shares of stock.
Stockholders
-are the people who buy shares of stock and are considered as the legal owners of the corporation.
Top 10 Corporations in the Philippines (2018)

1. San Miguel Corp.

(Revenues: P826.086 billion, Net Income: P54.814 billion)
2. Top Frontier Investment Holdings, Inc.
(Revenues: P826.058 billion, Net Income: P53.250 billion)
3. Petron Corp.
(Revenues P434.624 billion, Net Income: P14.087 billion)
4. SM Investments Corp.
(Revenues: P396.149 billion, Net Income: P51.519 billion)
5. Manila Electric Co.
(Revenues: P282.556 billion, Net Income P20.499 billion)
6. Government Service Insurance System
(Revenues P275.186 billion, Net Income: P94.706 billion)
7. JG Summit Holdings, Inc.
(Revenues P273.445 billion, Net Income: P39.519 billion)
8. Ayala Corp.
(Revenues P266.786 billion, Net Income: P49.867 billion)
9. Mermac, Inc.
(Revenues: P266.786 billion, Net Income: P49.864 billion)
10. GT Capital Holdings, Inc.
(Revenues: P239.811 billion, Net Income: P21.251 billion)

TYPES OF CORPORATIONS
1. C-Corporation: The most common type of corporation. It protects the entrepreneur from
being personally sued for the actions and debts of the corporation.
2. Subchapter S-Corporation: A corporation that is taxed like a sole proprietorship or
partnership with each shareholder paying tax on the amount of their proportionate shares.
3. Nonprofit Corporation: Legal entities that make money for reasons other than the owner’s
profit.
Examples: Churches, Charities, education foundations, and trade associations
4. Limited Liability Company (LLC): A new type of business ownership that provides limited
liability and tax advantages.
Examples: Law firms o Medical firms

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A. Advantages of Corporation
Establishing a business as a corporation has a number of advantages over sole proprietorship
and a partnership:

1. Ability to Raise Capital

- A major advantage of corporation is its ability to raise capital by issuing shares of stock. If
the corporation needs money for growth, expansion, or other purposes, the company can
sell additional shares of stock to raise the necessary funds.
2. Limited Liability
- A great advantage to the stockholders, or owners of a corporation, is that they have limited
liability. This means that the owners are liable only up to the amount of their investments.
3. Easy Entry and Exit
- People can easily enter or leave the business by buying or selling their shares of stock.
4. Continuous Life
- Compared to sole proprietorship which has limited life, corporation, on the other hand has
continuous life. This means that even if the owners retire, die, or sell their business, the
corporation will continue to operate because under this form of business ownership, the
change of owners does not end the legal operation of the business.

B. Disadvantages of Corporation
Although corporation has several advantages over the two forms of ownership, it still possesses
a number of drawbacks or disadvantages:
1. Complex and Expensive Set-up
2. Legal assistance is needed to start a corporation.
3. Corporations are subject to more government regulations than partnerships or sole
proprietorships.
4. A lot of paperwork is involved in running a corporation.
5. Slow decision-making process
6. Income is taxed twice.

LEARNING CONTENTS (Other Ways to Start a Business)

In general, there are three other ways by which entrepreneur could start their business.
These are:
1. Buying an Existing Business
2. Entering a Family Business
3. Owning a Franchise Business

1. Buy an Existing Business

Buying an existing business may be beneficial because it already has its customers,
suppliers, and procedures. In addition, the seller of the business may even be willing to train the
new owner on the proper handling of the business and its day to day operations.
However, most of the businesses that are up for sale are those that are not making profit.
Therefore, the entrepreneur that chooses to start their business through purchasing an existing
venture should really try hard to change the prior image of the business. Another disadvantage of

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purchasing an existing business is the possibility of inheriting the problems that the former
management or owner have with their previous customers, partners, and suppliers.
2. Entering a Family Business
There is a certain sense of pride and accomplishment that comes from being part of a family
endeavor, which have already been part of several generations of their family history. In addition, one
advantage of entering a family business is knowing that the efforts that one will be exerting are for
the benefit of those whom they care about.
Although, it is easier to enter entrepreneurship through family business, several
disadvantages also characterize it. One of the major drawbacks is that family politics may affect
decisions regarding the business. This includes having the senior management positions assigned to
elder family members who may not be the best qualified. Lastly, it is difficult to separate business life
and private life in family-run businesses.
3. Owning a Franchise Business
A franchise is a legal agreement that gives an individual the right to market a company’s
products or services in a particular area. The persons involve in a franchise are the franchisee and
the franchisor. The Franchisee is the person who purchases a franchise agreement, while the
Franchisor is the person or the company who sells a franchise. The fee that the franchisee pays in
return for the right to run the business is called the Initial Franchise Fee.

Advantages of Purchasing a Franchise:

1) An established product or service is being provided.
2) Franchisors often offer management, technical, and other assistance.
3) Equipment and supplies may be less expensive.
4) A guarantee of consistency attracts customers.

Disadvantages of Purchasing a Franchise:

1) The cost of franchises may be high, which can reduce profits.
2) Franchise owners are limited in the decisions they can make regarding the business.
3) The performance of other franchises impact on the franchisee.
4) The franchise agreement may be terminated by the franchisor.

LEARNING ACTIVITY 1

Identification. Write the answer on the space provided.

_____________1. It is a type of corporation that is taxed like a sole proprietorship or partnership with
each shareholder paying tax on the amount of their proportionate shares.
_____________2. It refers to the legal agreement that gives an individual the right to market a
company’s products or services in a particular area.
_____________3. It is a type of corporation that is defined as the legal entities that make money for
reasons other than the owner’s profit.

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_____________4. It is defined as the type of business ownership that is chartered by a state and
legally operates apart from its owners.
_____________5. It is defined as the type of business ownership that is owned and operated by one
person.

LEARNING ACTIVITY 2

ESSAY

1. If you are to start your own business, what form of business ownership will you choose?
Justify your answer using 3-5 sentences.
2. Assume that your family has been operating a business for several years already. Will you
decide to join your family business or establish your own?
3. Explain the difference between Unlimited and Limited Liability.

SUMMARY

This module focused on the different forms of business ownership namely, Sole
Proprietorship, Partnership, and Corporation. This module has illustrated that each of these forms
have their advantages, as well as disadvantages. Entrepreneurs are also provided with three other
ways to start their business. These are purchasing an existing business, entering their family
business, and purchasing a franchise.

REFERENCES

Essentials of Entrepreneurship. 3G Elearning FZ LLC, 2016.

Hisrich, R. & Peters, M. (1999). Entrepreneurship. Fourth Edition. Irwin/Mcgraw-Hill.

Medina, R. (2010). Entrepreneurship and Small Business Management (2nd ed). Manila: Rex
Bookstore

Skripak, S. (2016). Forms of Business Ownership. Pamplin College of Business and Virginia Tech
Libraries. Retrieved from https://vtechworks.lib.vt.edu/bitstream/handle/10919/70961
/Chapter%205%20Forms%20of%20Business%20Ownership.pdf?sequence=10&isAllowed=y

Types of Business Ownership. Chapter 16. Retrieved from

https://www.jenksps.org/pages/uploaded_files/chap16.pdf

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