Chapter 1.

1
The Role of Business in Social and Economic
Development
NATURE AND FORMS OF BUSINESS
A. What is Business?
 A business is an organization or economic system where goods and
services are exchanged for one another or for money.
 A business organization is an entity formed for the purpose of
carrying on commercial enterprise. Such an organization is
predicated on systems of law governing contract and exchange,
property rights, and incorporation.
 A business, also known as an enterprise, agency or a firm, is an
entity involved in the provision of goods and/or services to
consumers. Businesses are prevalent in capitalist economies, where
most of them are private owned and provide goods and services to
customers in exchange for other goods, services, or money.
Businesses may also be social not-for-profit enterprises or state-
owned public enterprises targeted for specific social and economic
objectives.
 Business can refer to a particular organization or to an entire
market sector, e.g. “the music business.” Compound forms such as
agribusiness represent subsets of the word’s broader meaning, which
encompasses all activity by supplier of goods and services. The goal is
for sales to be more that expenditures resulting in a profit.
B. Basic Form of Business Organizations
1. Sole Proprietorship
A sole proprietorship, also known as a sole trader, is owned by one
person and operates for his benefit. The owner may operate the
business alone or with other people. A sole proprietor has unlimited
liability for all obligations incurred by the business, whether from
operating costs or judgments against the business. All assets of the
business belong to a sole proprietor, including a computer, for
example, or any inventory, manufacturing equipment, and/or retail
fixtures, as well as any real property owned by the business.
Advantages of a Sole Proprietorship
1. Easiest and least expensive form of ownership to organize.
2. Sole proprietors are in complete control, and within the
parameters of the law, may make decisions as they see fit
3. Profits from the business flow-through directly to the owner’s
personal tax return.
4. The business is easy to dissolve if desired.
B. Basic Form of Business Organizations
Disadvantages of a Sole Proprietorship
1. Sole proprietors have unlimited liability and are legally
responsible for all debts against the business. Their business and
personal assets are at risk.
2. May be at a disadvantage in raising funds and are often limited to
using funds from personal savings o consumer loans.
3. May have a hard time attracting high-caliber employees, or those
that are motivated by the opportunity to own a part of the
business.
4. Some employee benefits such as owner’s medical insurance are
not directly deductible from business income (only partially as an
adjustment to income)
2. Partnership
A partnership is a business owned by two or more people. In most
forms of partnership, each partner has unlimited liability for the
debts incurred by the business. The three most prevalent types of
for-profit partnerships are general partnerships, limited
partnerships, and limited liability partnerships.
In a partnership, two or more people share ownership of a single
business. Like proprietorship, the law does not distinguish between
the business and its owners. The Partners should have a legal
agreement that sets forth how decisions will be made, profits will be
shared, disputes will be resolved, how future partners will be
admitted to the partnership, how partner can be bought out, or what
steps will be taken to dissolve the partnership when needed.
2. Partnership
A partnership is a business owned by two or more people. In most
forms of partnership, each partner has unlimited liability for the
debts incurred by the business. The three most prevalent types of
for-profit partnerships are general partnerships, limited
partnerships, and limited liability partnerships.
In a partnership, two or more people share ownership of a single
business. Like proprietorship, the law does not distinguish between
the business and its owners. The Partners should have a legal
agreement that sets forth how decisions will be made, profits will be
shared, disputes will be resolved, how future partners will be
admitted to the partnership, how partner can be bought out, or what
steps will be taken to dissolve the partnership when needed.
2. Partnership
Advantages of a Partnership
1. Partnerships are relatively easy to establish; however, time should
be invested in developing the partnership agreement.
2. With more than one owner, the ability to raise funds may be
increased.
3. The profits from the business flow directly through to the partner’s
personal tax return.
4. Prospective employees may be attracted to the business if given the
incentive to become a partner,
5. The business usually will benefit from partners who have
complementary skills.
2. Partnership
Disadvantages of a Partnership
1. Partners are jointly and individually liable for the actions of the
other partners.
2. Profits must be shared with others.
3. Since decisions are shared disagreements can occur.
4. Some employee benefits are not deductible from business income
on tax returns.
5. The partnership may have a limited life; it may end upon the
withdrawal or death of a partner.
3. Corporation
The owners of a corporation have limited liability and the business
has a separate legal personality from its owners. Corporations can be
either government-owned or privately owned. They can organize either
for profit or as not-for-profit organizations. A privately owned, for
profit corporation is owned by its shareholders, who elect a board of
directors to direct the corporation and hire its managerial staff.
A corporation, chartered by the state in which it is headquartered, is
considered by lay 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 decision. It has a life of its own and does not
dissolve when ownership changes
3. Corporation
Advantages of a Corporation
1. Shareholders have limited liability for the corporation’s debts or
judgments against the corporation.
2. Generally, shareholders can only be held accountable for their
investment in the stock of the company.
3. Corporations can raise additional funds through the sale of stock.
4. A corporation may deduct the cost of benefits it provides to officers
and employees
5. Can elect S corporation status if certain requirement are met. This
election enables the company to be taxed similarly to a
partnership.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
3. Corporation
Disadvantages of a Corporation
1. The process of incorporation requires more time and money than
other forms of organizations.
2. Corporations are monitored by the government and some local
agencies, and as a result, may have more paperwork to comply with
regulations.
3. Incorporating may result in higher overall taxes. Dividends paid to
shareholders are not deductible from business income; thus this
income can be taxed twice.
C corporations are considered separate tax-paying entities. C
corporations file their own income tax returns, and income earned
remains in the corporation until it is paid as a salary or wages to the
corporation’s officers and employees. Corporate income is often taxed
at lower rates than personal income, so you can save money on taxes by
leaving money in the corporation.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 S corporations are pass-through entities, meaning that their income,
losses, deductions and credits pass through the company and become
the direct responsibility of the company’s shareholders. The
shareholders report these items on their personal income tax
returns, thus S corps avoid the income double taxation that is
associated with C corps.

4. Limited Liability Corporation (LLC)

Limited Liability corporations in the USA, are hybrid forms of business
that have characteristics of both a corporation and a partnership. An
LLC is not incorporated; therefore it is not considered a corporation.
Nonetheless, the owners enjoy limited liability like in a corporation.
An LLC may choose to be taxed as a sole proprietorship, a
partnership, or a corporation. An LLC is a limited liability company.
This business structure protects the owner’s personal assets from
financial liability and provides some protection against personal
liability.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
5. Cooperative
Often called “coop”, a cooperative is a limited liability business
that can organize for-profit or non-profit. A cooperative differs from
a corporation in that it has members, not shareholders, and they
share decision-making authority. Cooperatives are typically
classified as either consumer cooperatives or worker cooperatives.
Cooperatives are fundamental to the ideology of economic
democracy.
A cooperative is a business organization owned by a group of
individuals and is operated for their mutual benefit. The persons
making up the group are called members. Cooperatives may or may
not be incorporated.
Some examples of cooperatives are water and electricity (utility)
cooperatives, cooperative banking, credit unions, and housing
cooperatives.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
5. Cooperative (continuation…)
Cooperative organizations are those organization, which are
different from the rest, as they are formed not for the purpose of
making profit but to provide its members’ goods and services at
reasonable prices. This form of organization protects and safeguards
the economic interest of its members.
Cooperatives are, therefore, voluntary associations, formed with a
service motive, the primary source of income being the members’
shares, they get dividends on trading surplus, if any. The
organization functions as a separate legal entity in a democratic way
and is governed by the state regulation.
There are different types of cooperatives like consumer’s
cooperatives, producers’ cooperatives, marketing cooperatives,
housing cooperatives, credit cooperatives, farming cooperatives,
etc.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
5. Cooperative (continuation…)

The structure of a cooperative organization ensures:

1. All members have an equal say (one vote per member, regardless of
the number of shares held).
2. Open and voluntary membership.
3. Limited interest on share capital
4. Surplus is returned to the members according to amount of
patronage.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
5. Cooperative (continuation…)
Advantages of a Cooperative Organization
1. Generally inexpensive to register.
2. A cooperative is owned and controlled by members.
3. Members have an equal vote at general meetings regardless
of their level of investment or involvement.
4. All members must be active in the cooperative.
5. This type of organization has limited liability.
6. Profit distribution to members is carried on in proportion to
the use of service; surplus may be allocated in shares or
cash.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
5. Cooperative (continuation…)
Disadvantages of a Cooperative Organization
1. A cooperative entails longer decision-making process.
2. It require members to participate for success.
3. It has less incentive, and there’s also a possibility of
development of conflict between members.
4. As cooperatives are formed to provide a service to members
rather than a return on investment, it may be difficult to
attract potential members seeking a financial return.
5. There is usually limited distribution of profits to members and
some cooperatives may prohibit the distribution of any surplus.
6. Members providing greater involvement or investment will still
only get one vote.
7. Extensive record keeping is necessary in this form of organization.
8. Requires ongoing education for members.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C. Basic Classifications of Business
1. Service Business

a) Services Businesses

b) Financial businesses

c) Transportation

d) Utilities

2. Merchandising Businesses

a) Retailers and distributors

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C. Basic Classifications of Business
3. Manufacturing Businesses

a) Agriculture and Mining businesses

b) Manufacturers

c) Real Estate Businesses

d) Information Businesses

4. Hybrid Businesses – are businesses that may be classified in more

than one type of business.

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition.
May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.