Module 1 - Lesson 2

Types of Business Organization

Learning Outcomes:

At the end of the lesson, Students are expected to;

• Identify the different types of Business Organization
• Compare and contrast each form of organization.
• Enumerate the different forms of corporation and understand the powers and
classifications of corporation.

TYPES OF BUSINESS ORGANIZATION

Hospitality Management is eminent in the proliferation of different establishments like

hotels, resorts, tourist inns, motels, apartels, pension houses, restaurants, department stores,
shops, sports, and recreational clubs/centers, museums, training centers, transportation, travel
agency, ect. In this regard, it is necessary to include in this module the concepts of business that
the students may probably deal with in the near future.

The 4 Major Business Organization Forms

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.
Figure 1: Basic requirement to become legally sole proprietor. (DTI - Department of Trade and
Industry)
Figure 2: Sample Documents for applying a business. (DTI - Department of Trade and Industry)

Advantages of sole proprietorship:

• All profits are subject to the owner

• There is very little regulation for proprietorships

• Owners have total flexibility when running the business

• Very few requirements for starting—often only a business license

Disadvantages of sole proprietorship:

• 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.
Figure 3. Comparison and Contrast of Limited and General Partners.

Example: Greg’s band wants to form a partnership. General partners will include the drummer,
two guitarists, one keyboardist, and one singer. Greg’s great-uncle, a musician in his own right
plans to provide $30,000, but does not plan to participate in the gigs, only in the profits. The
band will form a limited partnership.

Example:
Figure 4. Describes what is limited liability is.

General – Limited Partner

One who has all the rights and powers and is subject to all the restrictions of a general
partner, except that, in respect to his contribution, he shall have the rights against the other
members which he would have had if he were not also a general partner. He shall be liable pro-
rata to partnership creditors to the extent of his separate assets have been exhausted, but he can
demand reimbursement of the amount he paid co-partners.

Example: Manuel, Alberto and Conrado are partners in MAC Company, Ltd with Manuel as
limited partner, Alberto as general partner and Conrado as general - limited partner. The
partnership has assets of 60,000 and liabilities of 90,000. In the settlement of the liabilities, the
assets will 90,000. In the settlement of liabilities , the asset will be first exhausted . Thereafter,
the creditors can collect the balance of 30,000 from the separate assets of Alberto and Conrado
who will be liable for 15,000 each. After payment to the creditors, Conrado may demand
reimbursement of 15,000 from Alberto. This is so because as to third persons, Conrado is a
general partner, but among the partners, he is a limited partner. Manuel will not be able with his
separate assets being a limited partner.

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 of partnerships:

• 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. It s 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.

It is an artificial being

There are two kinds of persons under the law: natural persons and artificial persons. A
corporation falls under second kind. It has personally separate and distinct from the stockholders
or members and which commences upon the issuance of its certificate of incorporation.

1. The debts of the corporation are not the debts or its stockholders, nor are the debts of the
stockholders the debts of corporation.

2. The stockholders are not the owners of assets of corporation but have only an indirect interest
therein.

3. In taxation, the income of the corporation is not the income of the stockholders who may still
be required to pay taxes on the dividends that they may derive from such income.

It is created by operation of law.

A corporation does not come into existence by the mere agreement of the parties. Persons
desiring to form a private corporation must comply with the requirements of the law governing
its creation.

It has the right of succession

A corporation as a rule, continues to exist for the period for which it has been formed
regardless of the changes in the ownership of its stock or on its membership. Its existence is not
affected by death, insolvency or incapacity of the individual stockholders or members.

STEPS OF FORMING A CORPORATION

1. Select company’s name.

2. Write and file Articles of Incorporation paperwork.

3. Pay fees and taxes.

4. Hold organizational meeting.

5. Adopt bylaws, elect directors, pass operating resolutions.

Figure 5. Illustrates an example of an Organizational Chart.

Examples of Corporations in the Philippines

Figure 6. Samples of different corporation logos in the philippines. (JTC Foods)

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 of a corporation:

• 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 an LLC:

• 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

Figure 7. Types of corporations and its differences. (Fitsmallbusiness.com)

NATIONALITY OF CORPORATION.

1. The place of Incorporation Test is the principal doctrine on the test of nationality of
corporation in the Philippines. It adheres to the belief that a corporation is a nationality test of the
country under whose laws it has been organized and registered.

2. The Control Test adheres that the nationality of the Corporation is determined by the
nationality of the majority of stockholders on whom the control is vested

Classification of Corporation in Relation to State

1. Public Corporations - are those formed or organized for the government of a portion of the
state. Example: Municipality for government functions. (Municipal water Company, Public
Hospital)

2. Private Corporations - are those formed for some private purpose, benefit or end. Examples:
ABS-CBN Corporation, Jollibee Foods Corporation, San Miguel Corporation.

3. Quasi- Public Corporations - is a cross between private corporations and public corporation.
Examples: School Districts, Water Districts, PLDT.

Classification of Corporation as to the Place of Incorporation

DOMESTIC CORPORATION: This kind of corporation obtained personality through

incorporation under the Philippine laws.

FOREIGN CORPORATION is licensed by SEC to do business in the Philippines under the

principle of RECIPROCITY, after securing a certificate of authority from the Board of
Investments under EO 226 or the Omnibus Election Code and after complying with the
conditions for issuance of the license or application forms, structural organizations and
capitalization. The reasons for this are: a. to place them on equality with domestic corporations;
b. to subject them to inspection so that their condition may be known; c. to protect the residents
of state doing business with them by subjecting them to the courts of state.

Classification of Corporation as to Stock

1. Stock Corporation - Private corporation which have capital stock divided into shares and the
stockholders are entitled to their shares of dividends or allotment of the corporate surplus profits
based on their stock holdings or subscription.
2. Non-Stock Corporation - These are corporation which do not issue stocks and are composed
of members, not stockholders. They may be civic, charitable, religious or professional
organization.
Ex. Philippine Institute of Certified Public Accountant

Other Kinds of Corporation

De Jure Corporation. It is a corporation which complied with the requirements of the law.

De Facto Corporation. Those who failed to comply with one or two legal requirement of the
law.

Corporation Sole. It is composed of one member or or corporator and generally applies to

religious
denominations. Ex. The corporation sole of the Catholic Church is Cardinal Sin and his
successor.

Close Corporation. This usually owned and managed by a family. All the outstanding stocks are
owned and managed by a family; Stocks are not open for public subscription.

Open Corporation. All the member of corporations exercises their right to vote to elect the
directors and other officers of the corporation; the stocks are open for public subscription.

Eleemosynary Corporation. This corporation is established for charitable purposes.

Ecclesiastical Corporation. This corporation is establishing for religious purposes.

Lay Corporation. This corporation is established for any purpose other than religion.

Corporate Aggregate. This is composed of one member or corporator.

Corporation by Estoppel. This is a kind of corporation wherein member assume to act as

corporation despite the knowledge of the non-existence of corporate personality. In this case all
the persons involved will be liable as general partners.

Multi National Corporation. A corporation organized in one state or country but extends its
corporate business in other territories or countries.

POWERS OF CORPORATION

The powers of corporation can either be expressed or implied.

• The power is expressed if the corporation can perform functions as stipulated in the by Laws,
Corporation Code and such other statutes pertinent to the corporation.

• In implied power, the power is inherently necessary in the exercise of its corporate function in
the pursuit of its corporate existence.

DIFFERENT CORPORATION DOCTRINES

Doctrine of Piercing the Veil of Corporate Existence.

It is general principle under the law that a corporation has a personality which is separate and
distinct from its members.

Doctrine of Business Opportunity

This doctrine refers to the case when a director or officer of the corporation is presented with a
business venture which can be profitably handled by the corporation. He must give that business
opportunity to the corporation, he shall be held liable to refund to the corporation whatever
profits and benefits he may have derived from such business opportunity.

Trust Fund Doctrine.

When the director of the solvent or insolvent corporation distribute all the corporate assets to the
stockholders without reserving any assets for the payment of corporate debts and liabilities. The
directors or officers, together with the stockholders who received the assets are considered
trustees and the corporation and creditors can recover from the stockholders. Such corporate
assets they received shall be sold at public auction for the settlement of corporate liabilities.

Distinction between Corporators and Incorporators

Corporators Incorporators stock or non-stock.

These are the total number or persons who They must be natural persons. A juridical
compose the corporation after its formation person cannot be incorporator. The law
which include the incorporators, the provides that the incorporators must be atleast
stockholders and/or members. five (5) but not more then (15).

References:

Book:
Pertinent Laws on Hospitality Management (Tourism Laws)(Marahan, Mario H., DPA, LIB ,
Maranan, Jovid Maricar D., DBA , Caluza, Cristina N., MBA)

Website:
https://fitsmallbusiness.com/