Big Picture C

Week 6-7: Unit Learning Outcomes (ULO): At the end of the unit, you are expected
to:

a) Assess the different forms of business organization.

b) Examine the characteristics of different market structures.

Big Picture in Focus: ULO - A. Assess the different forms of

business organization.

Metalanguage

Below are the essential terms that you will encounter in this section. Again, you are
advised to refer to this section for a better understanding of the succeeding topics.

1. Liability. This refers to obligations the company should pay.

2. Situs. This term refers to the place where something is located.

3. Incorporators. This refers to the people who set up and form the corporation.

Essential Knowledge

Business organizations are important part of the economy. They provide the needs
and wants of the customers with the goal of earning profit. They are also the biggest
contributor of revenue to an economy. Business and government work together for
progress and development. Businesses pay the necessary taxes to the government,
and in return, the government provides proper infrastructures. In this section, we will
discuss the forms of business as well as their advantages and disadvantages.

Forms of Business

1. Single or Sole Proprietorship. This is a form of business owned and managed by

a single person known as proprietor.

Advantage

▪ Easy to organize as it only involves a few business requirements.

▪ The owner has absolute freedom in decision-making.

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 ▪ Financial operations are not complicated as this is a small-scale enterprise.
▪ The owner enjoys all the profits.

Disadvantage

▪ Limited availability to raise capital. Funds are limited because of their size, and
only one person can raise a capital to run the business, which is often from
personal savings or consumer loans.

▪ The owner has unlimited liability. The proprietor risks not only the assets of his
enterprise but also his other personal assets which are not part of his business.
In case of loss, his creditors can go after his business and personal assets.

▪ Limited ability to expand. Due to limited capital, sole proprietorship may have
difficulty in expanding.

▪ Business is entirely the responsibility of the owner. The proprietor has no one
to share the burden of decision-making and losses he might incur. Whatever
happens to the business, the owner is 100% liable.

2. Partnership. This form of business is an association of two or more people who

agree to place money, property, or industry in a common fund with the aim of sharing
profits among themselves.

Types of Partnership

1. Based on their contribution

▪ Capitalist partner – contributes assets such as money and property for the
business's capital.

▪ Industrial partner – is one that provides services to the operation of the

business. He is actively involved in the management of day to day operations
of the enterprise.

▪ Capital-industrial partner – is one that contributes both capital and service to

the business.

2. Based on their liability for partnership debts

▪ General partner. A general partnership is one in which all partners have equal

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 authority to manage and control the business. General partners do not have
limits in terms of liability, which means they could lose more than what they
invest i.e., their personal assets would have to be used if they incur losses.

▪ Limited partner. A limited partnership requires at least one general partner

who is responsible for running the business. Unlike a general partner, a limited
partner does not have total responsibility for the liabilities incurred by the
business. In case of losses, his liability does not go beyond his investment.
However, a limited partner does not have the authority to manage or control the
business. The partnership agreement will specify exactly which partner(s) have
certain responsibilities and authority.

Advantage

▪ Easy to form. Like the sole proprietorship, fewer requirements are needed to
accomplish in developing and maintaining a partnership business.

▪ Flexibility of operations. Certain concerns can be addressed immediately by the

partners, and decision-making can be fast-track.

▪ Efficiency in operations. Since there are more participants in the business

operation, more ideas can be solicited, making it more efficient.

▪ Possibility of bigger resources. Considering the combined financial resources

of the partners, financial institutions may extend bigger loans to the partnership.
Thus, more capital can be used in business.

Disadvantage

▪ Partners have unlimited liability for partnership debts. Like sole proprietorship,
partners' liability may extend to their personal assets, losing more than what
they invest.

▪ It has a limited life. Partnership is unstable as it can be dissolved based on

partners’ agreement or upon withdrawal, incapacity, or death of a partner or
other causes that terminates the contract.

▪ Limited ability to raise capital. The amount of capital depends on how much can
be contributed by partners, hence there is still a limitation in funding the
business.

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3. Corporation. “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 incident to its existence” (Section 2 of the Corporation Code).

A corporation has a separate entity from the owners and does not change even when
ownership changes. The owners – known as “stockholders” have an undivided
ownership share in the assets upon the dissolution of the corporation; and a share in
its profit corresponding to the shares they own.

Classification of Corporations

1. Based on the nature of its capital

▪ Stock corporation – is one wherein the capital is in the form of shares of stock.
You need to buy the shares to be part of the corporation. The corporation earns
a profit and then distributes it to the shareholders in the form of dividends.

▪ Non-stock corporation – is one that is open to all interested. No dividend is

distributed among members. Examples of this would be a charitable,
educational or religious institution.

2. Based on purpose

▪ Public corporation – is owned and organized by the government.

▪ Private corporation – is owned and organized by private businesses.

3. Based on relation to another corporation

▪ Parent corporation – is one that has controlling interest on another corporation

so that it has the power either directly or indirectly, to elect the majority of the
directors of such other corporation.

▪ Subsidiary corporation – is the investor corporation controlled by the parent

corporation.

4. Based on the situs of incorporation

▪ Domestic corporation – is a corporation formed under Philippine Law.

▪ Foreign corporation – is a corporation formed and organized under the laws

of another country.

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5. Based on whether they want to open in public or not

▪ Close corporation – is one that is limited to selected persons or members of

the company

▪ Open corporation – is open to any person who may wish to become a part or
stockholder thereof.

Voting in a Corporation

In a stock corporation, the manner of voting is called cumulative voting – which

means a stockholder is entitled to cast votes equal to the number of shares he/she
owned multiplied by the number of directors to be elected.

In a non-stock corporation, every member can cast as many votes as there are
directors to be elected but may not cast more than one vote for one candidate unless
cumulative voting is authorized under the articles of incorporation.

Categories of Shares of Stocks

1. Common stock. Also referred to as the basic ownership in a corporation, this stock
represents the basic issue of shares. It has all the basic rights of a share of stock.

2. Preferred stock. This type of stock has certain preferences over common stock,
which may be in the distribution of dividends and corporate assets upon dissolution of
the corporation. Preferred stock also gets priority over common stock, so if a company
declared dividends, the preferred stockholders receive it first.

3. Class A shares. These are stocks offered to Filipino shareholders.

4. Class B shares. These are stocks offered to foreign shareholders.

5. Par value shares. These are the shares that have been assigned a fixed value in
the articles of incorporation.

6. No par value shares. These are the shares that have not been assigned a fixed
value.

7. Founders’ share. These shares are classified and are usually given to
incorporators.

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Dividends represents the corporation’s profit, which is distributed to stockholders
according to the proportionate interest of their shareholding.

Kinds of Dividends

1. Cash. This is paid in cash to the stockholders.

2. Property. This is in the form of non-cash assets of the corporation.

3. Stock. This is in the form of stocks (certificate of ownership) of the issuing

corporation.

4. Scrip. This is in the form of promissory notes indicating the kind of benefits the
stockholders shall be entitled to receive in the future (which could be cash, property,
stock, or others)

5. Bond. Bond is an instrument representing a loan made by the lender to a borrower

(usually a company or government). Simply put, it is a certificate of indebtedness.

6. Liquidating. This refers to the return of capital by a corporation.

Advantage

▪ It has legal capacity. Corporation has a separate judicial personality.

▪ It has continued and more or less permanent existence. Corporation has a life
span of 50 years, and subject to renewal for another 50 years. The death or
withdrawal of some officers does not affect its existence.

▪ Management is centralized. The Board of Directors (BOD) is the highest

governing body of a corporation. All decision-makings come from the top with
the provision of the articles of incorporation.

▪ It has the most efficient management. All processes of a corporation are

standardized from its creation, organization, management, and dissolution.

▪ Shareholders have limited liability. In case of bankruptcy, only the capital

contribution of the shareholders are affected. Creditors of the corporation
cannot go after the personal assets of the stockholders.

▪ Shareholders’ freedom. Shareholders are free to transfer their shareholdings

without the consent of other shareholders.

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 ▪ Ability to raise more capital. Corporations can sell stocks and bonds, which
enables it to raise more capital for the operation and undertake expansive
financial ventures.

Disadvantage

▪ Complicated to maintain and not easy to organize. Setting up a corporation

involves substantial paper works due to many requirements. It also takes longer
time to have approval from the Securities of Exchange (SEC).

▪ Governmental intervention. A corporation is subject to greater regulatory

control. It is closely monitored on their tax dues, employment, production of
commodities, among others.

▪ Subject to higher tax. Considering the huge revenue of corporations, they are
required to pay a higher percentage of tax. Compared to individual tax, the
corporation is subject to a 30% income tax.

▪ It has limited powers. The operations of the corporation are limited to the
provisions stipulated in the articles of incorporation.

▪ Abuses of corporation officials. Due to the minimum supervision of

stockholders, corporate officials may abuse their powers and authority.

▪ Impersonal or formal relationship between the officers and employees of a

corporation. Due to its size, it is possible that many stockholders, officers, and
directors are not familiar with each other.

4. Cooperative. Cooperative is defined under the Presidential Decree No. 175, as

follows: “Only organizations composed primarily of small producers and consumers
who voluntarily join together to form business enterprises which they themselves own,
control, and patronize.”

Principles of Cooperative

1. Open and voluntary membership

2. Democratic control

3. Limited interest in the capital

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4. Division of net surplus

5. Cooperative education

6. Cooperation among cooperatives

Self-Help: You can also refer to the sources below to help you
further understand the lesson:

*Line. (2015, Sep 01). Corporation, partnership or sole proprietorship? Daily

Gleaner Retrieved from
https://search.proquest.com/docview/1708405495?accountid=31259

*Rojas, R. L., & Pusey, J. M. (2020). INCORPORATING A BUSINESS- A

PLANNING OPPORTUNITY AND A PUZZLE. Practical Tax Strategies,
104(5), 8-22. Retrieved from
https://search.proquest.com/docview/2417372439?accountid=31259

*Sole proprietorship vs. corporation. (2019, Jul 03). The Lakeside Leader
Retrieved from
https://search.proquest.com/docview/2256041847?accountid=31259