Cha 3

CHAPTER THREE
FORMS OF BUSINESS
ORGANIZATIONS
1 5/14/2024
Legal Forms of Business Organization
 Various legal forms of business organizations are available to organize
businesses.These include:
 Proprietorship,
 Partnership,
 Cooperatives and
 Corporations.
 Each form of ownership has a characteristic internal structure, legal status,

size and field to which it is best suited.
 Each has key advantages and disadvantages and offers employees a
distinctive working environment.
2 By Mengistu N. 5/14/2024
1. The Proprietorship
 A sole proprietorship is a business owned by just one person,
although it may have many employees.
 It is the easiest form of business to start with limited funds.
 This person, also called a proprietor, is classified as self-
employed.
 Sole proprietorship is the most common form of ownership
among small businesses and can be cited as the first stage in the
evolution of the forms of business organizations.
Advantages of Sole Proprietorships
 Ease and low cost of formation and dissolution
 Owner-ship of all profits and personal incentive
 Freedom and promptness of action
 Business secrecy
 Social desirability
 Pride of ownership
 Single tax (tax breaks):
Disadvantages of Sole Proprietorships
 Unlimited liability-the risk of losses
 Limited financial resources
 Limitations in managerial ability & other special skills and
abilities
 Uncertain future
 Demands on time (overwhelming time commitment)
 Difficulty in hiring and keeping high achievement employees
 Few fringe benefits
2. The Partnership
 A partnership is a business run by two or more persons where their
relationship is based on agreement participating in the profits and

losses arising out of it.
 Or it is an association of two or more persons to carry on as co-
owners of a business for profit.
 Partnerships are voluntary associations, and most are relatively small
businesses.
 They are the least popular forms of business ownership.
Characteristics of Partnership
 Formation: contractual relationships between parties is desirable to be
written and signed, to prevent misunderstanding among the parties.
 This contract is called memorandum of association, articles of partnership
deed or partnership contract.
 Capital Contribution: Every partner shall make a contribution, which
may be in at the form of money, receivables, property or skill.
 Management: Partners can make an agreement how to share the
responsibility among themselves according to their experience and

knowledge.
 Duration: Legally a partnership comes to an end or terminated for
various reasons.
 It is terminated when any of the general partners withdraws dies or
become no longer to be a partner.
 Other legal characters:
 As in sole proprietorship, in a partnership each partner is personally
liable for the obligations of the business.
Advantages of partnership
 Ease of starting
 Increased sources of capital and credit
 Combined managerial skills (improved decision making potential)
 Definite legal status
 Personal supervision
 Reduced risk
 Motivation of important employees
 Tax advantages
Disadvantages of Partnership
 Unlimited liability
 Risk of implied authority
 Lack of harmony
 Lack of continuity (instability)
 Limited capital availability (size limitations)
 Investment withdrawal difficulty (frozen investment)
3. The corporation
 The corporations have emerged and grown up to overcome the above-
mentioned shortcomings of the previous forms of organizations and
 Meet the increased need of modern and large scale of industry and
commerce.
 Corporations are towers on the business landscape.
 While proprietorships are many in number, they are generally small in
size.
 In comparison, corporations are few in number, but generally large in size.
 Because corporations tend to be large, they play a powerful role in
the economy of our country.
 The most widely quoted definition for joint stock company or
corporation is given as an artificial person (being an association of

natural persons) authorized and
 Recognized by law, with distinctive name, a common seal,
 Comprising of transferable shares of fixed values,
 Carrying limited liability and having a perpetual or continued or
uninterrupted succession life.

Characteristics of Corporation
 Separate legal entity
 Limited liability
 Transferability of shares
 Death and Withdrawal of shareholders
 Common seal
 Separations of ownership from management
 Supervision
 Written constitution
 The Corporate Charter

Types of corporations
 Three types of corporations are commonly recognized. These are as
follows:
1.Governmental corporations: Often called public corporations.
2.Non-profit corporations: Similar to governmental corporations except
that they are formed and operated by private persons.
3.For-profit corporations: The aim of such corporations is to make a
profit that may be distributed to the shareholders as dividends.
For-profit corporations are further divided into: public corporations and
closed corporations.
I. Public/Open corporation: The stock is available for public who want
to buy it.
II. Private/Closed corporation: The stock is not sold to the public.
Advantage of a Corporation
 Financial strength
 Limited liability
 Scopes of expansion
 Managerial efficiency
 Ease in transferring ownership
 Legal-entity status
Disadvantages of Corporation
 Difficulty of formation
 Lacks of owner’s personal interest
 Delay in decision making
 Oligarchy and fraudulent management
 Lack of secrecy
 Double taxation
 Relative lack of credit
4. Cooperatives
 A Cooperative is a business owned and operated by its user-members for the
purpose of supplying themselves with goods and services,
 It is an organization owned by members/customers who pay an annual
membership fee and share in any profits (if it is profit making organization).
 Owners, managers, workers, and customers are all the same people.
 These cooperatives are formed to give members more economic power as a

group than they would have as individuals.
 Members have an equal vote in decisions; membership is open to everyone who
fulfills specified conditions assets controlled, and usually owned jointly by
members;
 Profit shared equally between members with limited interest payable on loans
made by members
Characteristics of cooperative
 Universal form of organization
 It is an enterprise
 It is a service enterprise
 Promotes welfare of the community as a whole
 An association of human beings, not a union of capital
 Owned and democratically controlled by member-users
 Cooperative eliminates economic duality through member-user
identity
Types of Cooperatives
 Cooperatives can be classified into different categories based on
1.Groups serviced: Farmers’ cooperatives, consumers’ cooperatives, students’

cooperatives, suppliers’ cooperatives, etc.
2.Type of membership: Local, centralized, and national cooperatives.
3.Geographic location: Local, regional, national, and international cooperatives.
4.Function: Producers’ cooperatives, purchasing cooperatives, service

cooperatives, suppliers’ cooperatives, etc.
5.Financial structure: Stock cooperatives and non-stock cooperatives.
6.Legal status: Registered cooperatives and unregistered cooperatives.
Differences between cooperatives and charities
S.N Cooperatives Charities
1 Offer chance to poor people through Organize aid from outside by means of
self-help to influence their own philanthropy and altruism.
situation positively, improve their
living conditions, share risks and
mobilize underdeveloped local
resources.
2 Try to make people independent. Make people lean on others.

3 Create a feeling of self-respect. Weaken self-respect and hinder thrift and
self-reliance.
4 A solution to poverty. Not a solution.

5 Have little to offer in the situation of Can serve the poorest of the poor.
extreme poverty.
Criteria for choosing legal form of business ownership
 A number of criteria must be considered and some tradeoffs are
necessary. These are:
1. Organizational costs
2. Limited versus unlimited liability
3. Continuity
4. Transferability of ownership
5. Control
6. Raising new equity capital
7. Income taxes
By Mengistu N.
21 5/14/2024

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CHAPTER THREE

 Each form of ownership has a characteristic internal structure, legal status,

although it may have many employees.

 It is the easiest form of business to start with limited funds.

 This person, also called a proprietor, is classified as self-

 Sole proprietorship is the most common form of ownership

 Owner-ship of all profits and personal incentive

 Freedom and promptness of action

 Single tax (tax breaks):

 Unlimited liability-the risk of losses

 Limited financial resources

 Limitations in managerial ability & other special skills and

 Demands on time (overwhelming time commitment)

 Difficulty in hiring and keeping high achievement employees

 Few fringe benefits

 A partnership is a business run by two or more persons where their

relationship is based on agreement participating in the profits and

 Or it is an association of two or more persons to carry on as co-

owners of a business for profit.

 Partnerships are voluntary associations, and most are relatively small

 They are the least popular forms of business ownership.

written and signed, to prevent misunderstanding among the parties.

 This contract is called memorandum of association, articles of partnership

deed or partnership contract.

 Capital Contribution: Every partner shall make a contribution, which

may be in at the form of money, receivables, property or skill.

 Management: Partners can make an agreement how to share the

responsibility among themselves according to their experience and

 It is terminated when any of the general partners withdraws dies or

become no longer to be a partner.

 Other legal characters:

 As in sole proprietorship, in a partnership each partner is personally

liable for the obligations of the business.

 Increased sources of capital and credit

 Combined managerial skills (improved decision making potential)

 Definite legal status

 Motivation of important employees

 Risk of implied authority

 Lack of continuity (instability)

 Limited capital availability (size limitations)

 Investment withdrawal difficulty (frozen investment)

mentioned shortcomings of the previous forms of organizations and

 Corporations are towers on the business landscape.

 While proprietorships are many in number, they are generally small in

 In comparison, corporations are few in number, but generally large in size.

the economy of our country.

 The most widely quoted definition for joint stock company or

corporation is given as an artificial person (being an association of

 Recognized by law, with distinctive name, a common seal,

 Comprising of transferable shares of fixed values,

 Carrying limited liability and having a perpetual or continued or

uninterrupted succession life.

 Death and Withdrawal of shareholders

 Separations of ownership from management

 The Corporate Charter

 Ease in transferring ownership

 Lacks of owner’s personal interest

 Delay in decision making

 Oligarchy and fraudulent management

 Relative lack of credit

 These cooperatives are formed to give members more economic power as a

 Promotes welfare of the community as a whole

 An association of human beings, not a union of capital

 Owned and democratically controlled by member-users