Learning and understanding the nature of the organization is very vital in the process of appraising the growth, personnel,

operations,
and work environment of an entity. Undertaking an organizational analysis enables management to identify areas of weakness and then find
approaches for eliminating problems.
It is aligned with the BEC of the Department of Education following the prescribed MELCs (Most Essential Learning Competencies.
It has the following features proven to be valuable aids to learning Accountancy, Business, and Management even at home. What Happened?
This section contains pre-activities like review of the prior knowledge and a pretest on what the learners have learned in their previous
discussions.
What I Need To Know? (Discussion)
This section contains the definition of the terms Organization and its Nature. It also explains and identify the three common types of
organizational structures. It gives examples that clearly illustrate the nature of organizations and types of organization structures, its analysis and
design.
What I Have Learned? (Evaluation/Post Test)
The exercises contained in this section are guaranteed to build organization management comprehension, skills, and competence. These serve as
a diagnostic tool to identify the learners’ areas of strengths and difficulties.

OBJECTIVES:
K: Identify the nature of organization and types of organizational structures.
S: Analyze the nature of organization and explain the three common types of organizational structure.
A: Appreciate the importance of organization analysis and design in determining the appropriate hierarchical
structure of the company.

LEARNING COMPETENCY:

Analyze the nature of organization and types of organization structures (ABM_AOM11-Ih-j15-16)

I. What Happened
REVIEW:
 Three Main Types of Business Organizations

Sole proprietorship is a business owned by one person, hence the word sole, meaning one and only.

One advantage of a sole proprietorship is that the owner makes all the decisions. The owner is not obligated to confer with anyone when it
comes to deciding the location of the business, who to hire, what to sell, etc. Another advant age to an owner of a sole proprietorship is that
he or she is the recipient of all profits generated by the business. The owner is not legally bound to share the profits with anyone else.

While there are benefits to being a sole proprietorship, there are also drawbacks. One huge drawback is if the owner is sued, the owner is
held personally liable. Personal liability means if the person or entity wins the
lawsuit, the court can make the owner sell business and personal assets to satisfy the debt. Another disadvantage of this type of business
organization is that when the owner dies, the business will become defunct or terminate. Now, let us see if a partnership can
remedy some of these disadvantages.

Partnership is a business owned by two or more people. One major First option: Single Proprietor . In this form, Mr. Tiongco as a single
person holds the entire operations as his personal property, managing it on a dayto-day basis. Most businesses are of this type.

Sole proprietorships are attractive to small investors because they are relatively easy to start up. Also, the owner entitled to all the profits
that the sole proprietorship collects. On the other hand, sole proprietorships.

Advantages:

1. Formation: Less complicated in preparation of documents and cheaper compared to starting a formal corporation. The
proprietorship can be named after the owner, or a fictitious name can be used to enhance the business.
2. Tax benefits: no requirement to file a separate business report. One will list the business information and figures within his/her
individual tax return. The business will be taxed at the rates applied to personal income, not corporate taxes.
3. Decision making: Business decision remains the responsibility of the owner. The owner can also fully transfer the sole
proprietorship at any time as he/she deems necessary.

Disadvantages:

1. Liability: The business owner will be held directly responsible for any losses, debts, or violations coming from the business. For
example, if the business must pay any debts, these will be satisfied from the owner’s own personal funds. The owner could be sued
for any unlawful acts committed by him/her or the employees.
2. Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment
taxes.
3. Lack of “continuity”: The business may discontinue if the owner becomes deceased or incapacitated. Since the business and the
owner are treated as one and the same, upon the owner’s death, the business maybe liquidated and becomes part of the owner’s
personal estate, to be distributed to beneficiaries. However, this can result to heavy tax consequences on beneficiaries due to
inheritance taxes and estate taxes.
Difficulty in raising capital: Generating the capital or the initial funds is usually provided by the owner. Sole proprietorships do not issue
stocks or other money-generating investments unlike corporations.

advantage of a partnership is funding. Each owner can help with financing, start-up costs, or ongoing business expenses. Another advantage
is shared knowledge and experience.

However, one main disadvantage is that it would need to share any profit with the partner. The percentage split would be agreed upon by
each partner or may equal a percentage of what they put in to start the business.
This same percentage would be applied if the business were sued; each

partner would be liable to the percentage of ownership. Starting a corporation solves the personal liability issue of a sole proprietor and
partnership.

Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those
who own it. A Corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its
shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and
does not dissolve when ownership changes.

PRE-TEST:
 Below are three examples of businesses. For each, determine the optimal type of business organization by applying the knowledge from your
previous lesson. Be sure to support your answer by integrating case facts with the lesson material.
1. Lebron and Davis are long-time friends who plan to open a consulting service in Chicago next year. Lebron specializes in personal
finance, whereas Davis specializes credit management, making them a great team. Both wish to keep their tax filing requirements as simple as
possible.

2. Kuzma is a 52-year old teacher who has no children and is not married. He plans to start a business this summer to mow people’s
lawns in the neighborhood to earn some extra income while school is on summer break. His clients sign a legal waiver claiming that Kuzma has
no liability for any mishaps on the lawn.

3. Ronda and Green are a married couple who wish to begin operating a chemical plant since they are both chemists. The couple would
be working with highly toxic substances, but they are comfortable with this given their experience and the profit opportunity is great. Ronda and
Green also own an
8-floor apartment building in Manhattan.

II. What You Need to Know

DISCUSSION:
Nature of Organizations
Definition of an Organization
An organization is a collection of people who work together and coordinate their actions to achieve a wide variety of goals.

Nature of Organizations
An organization is a social arrangement which pursues collective goals, which controls its own performance, and which has a
boundary separating it from its environment.

To illustrate:
Let us assume now that Mr. Tiongco’s grocery business has grown by leaps and bounds. He is planning to open a branch in more
strategic place near busy Cubao. This will be handled by his son whom he has already trained in running his grocery business.

Mr. Tiongco has reached the crossroad of his business. Like any entrepreneur who started small but suddenly saw the growth of his
business, he began to wonder how he should get organized to face the challenges of the future. Shall he remain as a single proprietor-owner or
dilute his ownership by asking some of his trusted relatives and friends to be part owners and contribute more money for his expansion plans?

To put up a branch, Mr. Tiongco needs more capital to buy a commercial lot and to construct a building for his second grocery. He
must improve his credit standing by buying grocery goods payable in 60 days or more. To get a loan from a bank, his present assets are not
enough to serve as guaranty. So, he needs associates in his expanding business. What is the best approach in organizing and what are the
advantages? He consulted a lawyer-friend and he was given three options.

Second option: Partnership

A partnership is a single business with two or more people sharing its ownership. Each partner contributes to all aspects of the
business, including money, property, labor, or skill. In return, each partner shares in the profits and losses of the business.
Since partnership is a type of business that requires more than one person in the decision-making process, it is important that
potential business partners discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should
document how future business decisions will be made such as how the business partners will divide profits, resolve differences in decision
making, change of ownership, and how to dissolve the partnership.

Advantages:

1. Easy and Inexpensive: Partnerships are generally an inexpensive and easily formed type of business structure. Most of the time
spent starting a partnership often focuses on developing the partnership agreement between or among few people and its shared
ownership will expresses.
2. Shared Financial Commitment: Each business partner has equally invested in the success of the busines. Partnerships have the
advantage of pooling resources to obtain significant capital. This could be beneficial in terms of securing credit, or by simply
doubling your initial money or capital in the business.
3. Complementary Skills: A good partnership should be able to utilize the strengths, resources, and expertise of each partner.

4. Partnership Incentives for Employees: Partnerships have an employment advantage over other entities if they offer employees
the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.
 Partnership arrangements are mostly formed in Law, auditing, and some consultancy firms.

Disadvantages:

1. Joint and Individual Liability: Like sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for
their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets
1. Disagreements Among Partners: With multiple partners, in the business, there can disagreements like management styles, salary
schemes, etc. That is why it is important to consult each other on all decision making having to compromise and resolve disputes.
2. Shared Profits: Because partnerships are jointly owned, each partner must share the successes and profits of their business with
other partners. An unequal contribution of time, effort, or resources can cause dispute among partners.

Third Option: Corporation

Often, business owners opt to form corporations to protect themselves against financial and legal liabilities. A corporation is a type
of business that keeps the dealings, assets, and bank accounts separate from his/her personal assets.

This is especially true if a business owner, like Mr. Tiongco, needs more money to fund his business expansion. He wants to take a
bank loan, but his assets are not enough to mortgage. Besides, if qualified to get a loan, he may not be able to pay the loan and he will lose his
mortgaged properties if they are foreclosed. In short, he wants to protect his own personal wealth. So, he may decide to look for investors.

The investors are only shareholders of the corporation. However, investors will elect a set of board of directors responsible for the
different policies and vision for the corporation. The board of directors will also appoint corporate officers for a day-to-day operation of the
corporation. Usually a corporation has the following key personnel: a president, a secretary, and a treasurer, although there can be other
officers, such as vice presidents.

Advantages: