To God Be All The Glory!!!

SENIOR HIGH SCHOOL (GRADE 12)

ENTREPRENEURSHIP (Applied Track Subject)
Name : _____________________________ Class Schedule : _________________
Course/Year/Section : _________________ Professor : Dir. Joey Bolok, CESO, MPA

LESSON SIX
OWNERSHIP AND ORGANIZATION

“The best organizational structure suitable to a new business organization really depends
on the short- and long-term vision of the entrepreneur and one that suits its immediate goals.” –
Dr. N.A. Orcullo, Jr.

6.1 The Organizational Vehicle

 Before a business can open its doors to the buying public, there has to be a vehicle by which
products and services can be bought or availed of from the entrepreneur. Such vehicle or
organization has to be registered, authorized or licensed to transact business with the buying
public.
 The entrepreneur has the choice as to which organizational vehicle he or she would like to
establish or organize to be able to pursue his business and hopefully achieved the end goal –
profit.
 Entrepreneurs may either opt for any of the classes or forms of ownership whether the
entrepreneur wants full or partial control of the business.
 Before selecting the form of ownership, an entrepreneur must carefully analyze the pros
(advantages) and cons (disadvantages) of the various forms of business organization as shown
on TABLE 6.1 page 10.
 Although there is no best form of ownership in general, there may well be one best form of
ownership for each circumstance based on the biases and preferences of the entrepreneur.

6.2 The Sole Proprietorship (Single Proprietorship)

 It is a form of business organization initiated, organized, owned or capitalized and managed by a
single person (usually the business owner).
 As defined, the entrepreneur is the capitalist, the manager, administrator and in the beginning,
he practically does everything for the business.
 A single proprietorship business format is to be registered with the Bureau of Domestic Trade of
the Department of Trade and Industry (Sen. Gil Puyat Avenue, Makati City) for those operating
or doing business in the NCR or the Metro Manila area. Those in the regional and provincial
areas, registration can be made through the regional or provincial offices of DTI.
 Advantages :
Simple to organize
 A decision of the entrepreneur or business owner can lead to a quick organization or
registration of the business.
 For instance, the registration of a singe proprietorship business with the central office of
the Department of Trade and Industry (DTI) can be completed in about an hour.

Low start-up capital

 There is no law that sets a minimum level of capital requirement to put up or establish a
single proprietorship business.
 No show money or bank certificate is required to support a declared initial capital.

Owner owns all profits

 All the profits accrues to the owner/entrepreneur as he or she is not bound by any rule or
government regulation to share his profits to anybody.
 After paying what is due to the government (e.g. tax, dues, etc.), entrepreneurs keep all
the profits or plow it back to expand his business.

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
Total decision making authority
 A single proprietorship business is run by its owner as his own, hence, the decision
making function totally rests upon the hands of the owner/entrepreneur.

Easy to discontinue
 Unlike the partnership or corporation, a proprietorship is easy to dissolve or discontinue
the business. It is a purely a prerogative of its owner.

Good tax privileges

 Tax matters and other regulatory requirements favor the sole proprietorship over other
forms of business organization.

 Disadvantages :
Unlimited personal liability
 The context of unlimited personal liability is probably the single greatest disadvantage of
a sole proprietorship; that is, the sole proprietor is personally liable for all the debts of the
business.
 The proprietor owns all the business’s assets and if the business fails, the owner’s
personal assets can be sold to cover debts. The failure of the business can ruin the
financial position of the owner.

Limited skills and capabilities of the sole owner

 The skills that can benefit the business is limited to the skills and capabilities of the owner
which might not be enough or sufficient for the demands or needs of the business.

Limited access to capital

 A single proprietorship has a limited access to capital as compared to partnership or
corporation.
 Banks and financial institutions prefer to deal with partnerships and corporations in view
of the guarantee for continuity and all those inherent provisions that goes with
partnerships and corporations.

Lack of continuity for the business

 The death of the owner of a single proprietorship technically means the death of the
business also. Such scenario provide a venue for doubts and uncertainty on the part of
the employees and the financiers as well as suppliers of the business.

6.3 The Partnership

 It is an association of two or more business partners who co-own a business for the purpose of
making a profit. In a partnership, the co-owners (partners) share the assets, liabilities, and profits
of the business according to the terms of the partnership agreement.
 A partnership has to be registered with the Securities ad Exchange Commission (SEC) just like
the corporation. Generally, the law does not very specific rules or regulations as to the content of
the partnership agreement. What the law essentially requires is to see to it that its basic or
fundamental provisions is coherent with the Securities Act or the Corporation Code particularly
some provisions on partnership organizations.
 Types of Partners
General partners
 A general partner is one who shares ownership and management of the business and is
liable to the extent of his separate property after all the assets of the partnership are
exhausted.

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
Limited partners
 They refer to partners with limited financial liability and they do not take active role in the
management of the firm.
 A limited partner is one who is liable to the extent of his capital contribution.

Silent partners
 Silent partners are those not taking active role in the operation of the business but are
generally known to be partners of the business.

Dominant partners
 They are neither active in the partnership nor they are generally known to be associated
with business.

Capitalist partner
 A partner who contributes money or property to the common fund of the partnership.

Managing partner
 The partner who is designated to manage the operations of the business of the
partnership.

Industrial partner
 The partner who contributes his knowledge or personal services to the partnership.

Secret partner
 The partner who takes active part in the business but is not known to be a partner by
outside partners.

Nominal partner (Partner by estoppel)

 The partner who is actually not a partner but is held out or represented as a partner.

Liquidating partner
 The partner who is designated to wind up or settle the affairs of the partnership after
dissolution.

 Advantages :
Easy to establish
 Because only two or more can form a partnership, it can be said that relative to a
corporation, a partnership is easy to organized or established.

Complementary skills of partners

 Like the corporation, the skills of the partners can be exploited to the fullest to the benefit
of the partnership.

Division of profits
 There are no restriction on how profits will be distributed as long as they are consistent
with the provisions of the partnership agreement.

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
Large pool of capital
 The capital base of the partner can be availed of thus a form of advantage compared to
a proprietorship.

Ability to attract limited partners

 Depending on the provisions of the partnership agreement, the partnership can attract as
many partners (and so is capital and skills) as possible for the benefit of the partnership.

Little governmental regulation

 Like the sole proprietorship, the partnership form of business operations is not burdened
with red tape or subject of stringent regulations unlike the corporations.

Flexibility
 Although not as flexible as the sole proprietorship, the partnership can generally react
quickly to changing market condition.

 Disadvantages :
Unlimited liability of at least one partner
 At least one of every partnership must be a general partner and he/she has unlimited
personal liability, even though he or she often is the partner with least personal
resources.

Difficulty in disposing of partnership interest without dissolving the partnership.

 To be able to justify and fairly distribute the assets of the partnership, any of the partner
has to sell his interest to remaining partners which might be disadvantageous to him.

Lack of continuity
 Complication arise when one of the partner dies. Partnership interest is often
intransferable (unless provided for in the partnership agreement) through inheritance
because the remaining partners may not wish to be in association or partnership with the
person who inherits the interests of the deceased partner.

Potential for personality and authority conflict

 Friction may arise among partners is inevitable and difficult to control. Disagreement as
to what should be done or what was done has been the reasons for the dissolution of
many partnerships.

6.4 The Corporation

 It is an artificial being, invisible, intangible, and existing only in contemplation of law.
 Its owners are the stockholders or shareholders who can sell their interests in the corporation
without affecting the continuity of its operations because the life of the corporation is independent
or distinct from that of the owners or stockholders.
 Among the three major forms of business ownership, a corporation is more complex. Going for a
corporation or incorporating means sharing the burden and profit with someone else.
 Under the corporation code, the life of a corporation is 50 years.
 Like the partnership, a corporation is to be registered with the Securities and Exchange
Commission (SEC).

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
 Corporations are not only for big organizations but also for small businesses as well. There are
premises or reasons for incorporating and the following are just a few of them :
To protect personal finances and assets from business creditors.
To protect the entrepreneurs from actions of the business.
To take advantage of executive privileges and perks afforded to corporate employees and
officers.
To begin a business operations with structured set up that can withstand succession issues.
To have a better image for the business.

 Advantages :
Limited liability of the stockholders
 The liability of the stockholders or owners of the corporation is limited to the assets of the
corporation. That is, unlike the single proprietorship, the personal assets or properties of
every stockholder can not be sued for the liabilities or debts of the corporation.

Ability to attract capital

 As a prospective borrower from the bank or other financial institutions, a corporation is
more welcomed or preferred as compared to single proprietorship or partnership.
Besides, the incorporators and stockholders of the corporation itself are readily available
fund sources thus indicating the ability of the corporation to attract capital for whatever
purpose.

Transferable ownership
 Stock owners or stockholders of the corporation can easily effect transfer of ownership
without affecting the operations of the business.

Larger pool of skills, expertise, and knowledge

 Stockholders particularly those forming part of the Board of Directors or in the
management team are rich sources of skills and expertise which can be tapped by the
corporation to achieve its corporate agenda.

 Disadvantages :
Cost and time involved in the incorporation process
 In view of the relatively large number of persons involved in forming a corporation (i.e. at
least 5 incorporators), the cost involved and the time requirement for the formation or
incorporation registration process is somewhat longer and difficult. Built into a large
number of incorporators is the exercise of democratic processes in preparing the articles
of incorporation and by-laws that can eat up substantial time.

Taxation
 The nature of a corporation is subject to certain tax regulations which is more costly from
the viewpoint of both national income tax and local government tax rules.

Legal restrictions and regulatory red tape

 The administrative and legal processes that a corporation goes through in the conduct of
its business pose as burdensome and source of irritation to small-scale corporations.

Potential loss of control by founders of the corporation

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
 The nature of a corporation as well as the boundary between the powers of the
owners/founders and managers of the business may pose as constraint and threat to the
founders or stockholders of the corporation.

6.5 The Cooperative

 Republic Act 6938, otherwise known as the Cooperative Code of the Philippines, defined a
Cooperative as a duly registered association of persons, with a common bond of interest, who
have voluntarily joined together to achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a fair share of the risks and benefits
of the undertaking in accordance with universally accepted cooperative principles.
 Universally accepted principles of cooperatives :
Open and voluntary membership
 Membership in cooperative is a voluntary and available to all individuals regardless of
their social, political, racial, or religious background or beliefs.

Democratic control
 Cooperatives are democratic organizations wherein their affairs are administered by
personnel elected or appointed in accordance with their approved Constitution and By-
laws. Members of the primary cooperatives have equal voting rights irrespective of the
number of their capital share of stock.

Limited interest on capital

 Share capital received strictly limited rate of interest.

Division on net surplus

 Net surplus arising out of the operations of cooperative belongs to its members and shall
be equitably distributed for cooperative development common services, individual
reserved fund, and for limited interest on capital and/or patronage refund as specified in
the articles of incorporation and by-laws.

Cooperative education
 All cooperatives are mandated to make provision for the education of their members,
officers, employees and of the general public based on the principles of the
cooperatives.

Cooperation among cooperatives

 All cooperatives, in order to best serve the interest of their members and communities,
have to actively cooperate with other cooperatives at local, national and international
levels.

 Advantages :
Gain more profit.
 Forming a cooperative is somehow an oblique direction for the real obsession of being
an entrepreneur which is to gain as much profit.
.
Enjoy tax privileges.
 The advantage of the cooperative as the entrepreneur’s organizational vehicle is the tax
privileges that the government usually provides amongst cooperative organizations.

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
Gets government subsidy.
 In some government-sponsored projects, the cooperative usually receives some kind of
subsidy and other forms of privileges directed at its members.

Avail of concessionary terms from suppliers.

 The cooperative can also source its stocks or inventories from suppliers who offer
concessionary terms to cooperatives.

Ability to provide direct benefits to its members and the entire community.
 The greatest advantage of a cooperative as a business is the ability to provide direct
benefits to its members and the entire community it serves in the form relatively cheaper
products and services consistent with its mission of providing services rather than
existence for a purely profit motives.

 Disadvantages :
It is more of a service-oriented organization.
 As a cooperative is more of a service-oriented organization designed to achieve a
common goal and to equally share the returns afterwards.

Inequality of profit distribution.

 One disadvantage in using a cooperative as an organizational vehicle is its inequality of
profit distribution – with the same returns to all the members including those who did not
spent much efforts for it.
 Concomitantly, the enterprising or entrepreneurial member of the cooperative who spent
much efforts will in turn receive relatively lesser rewards as compared to the rest.

Its pro-masses or pro-poor bias is opposed to the entrepreneur’s goal of profit maximization.
 The pro-masses or pro-poor bias of the cooperatives appears diametrically opposed to
the entrepreneurs’ idea of servicing a market niche that is well-off enough to address its
dream of profit maximization.

The entrepreneur’s privilege for innovation and creativity in the seller’s market is
incompatible to the cooperative environment.
 The idea of seller’s market as a privilege of the innovative, creative and entrepreneurial
fellows is not compatible with a cooperative environment given its tendency to be more
sympathetic with its customers given the fact that a large chunk of its customers are
cooperative members themselves.

 Types and categories of cooperatives :

Credit Cooperative
 This form of cooperative promotes thrift and savings among its members in order to
grant loan for production and provident purposes.
.
Consumers Cooperative
 This type of cooperative is for the primary purpose of procuring commodities in bulk and
retail the same to the members and non-members.

Producers Cooperative

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
 This type of cooperative is organized to undertake a production-oriented concern may it
be agricultural or industrial in nature.

Service Cooperative
 As the name implies, this is a service-oriented cooperative which engages in such areas
as medical and dental care, hospitalization, insurance, printing, housing, labor, electric
light and power, communications and other services needed by the members and non-
members in the community.

Marketing Cooperative
 This type of cooperative engages in the supply of production inputs to members and
market their products.

Multi-purpose Cooperative
 This form of cooperative combines the concept of two or more of the business activities
of the different types of cooperatives.

6.6 Legal considerations in choice of organization

 In deciding what type of business organization to register, certain factors have to be considered.
The vital factors that need to be seriously taken into account are as follows :

Initial capital
 New business venture that is within the ability of the entrepreneur to capitalize can be a
major influence as the entrepreneur may opt for the bias of doing it by himself to rake all
the benefits of the venture.

Taxation and governmental regulations

 The initial choice of legal form may not be influenced greatly by problems included under
this category. But before long, taxation and regulations become more important. Factors
that may even force its owners to consider shifting or changing to other legal forms.

Exploitation
 Investors pooling together their resources to form a business may have mutual
intentions, however, this could be perceived the other way around. People, time, money,
and products can all be exploited under the right circumstances, and a variation in legal
form may be useful for this purpose. Incentive ownership, franchise, market position, and
many other operating techniques will often convince the owners or management of a
need for a different legal form for their operation for the business.

Growth, expansion, merger and sale

 Any of these factors may demand a shift to another legal form. In fact, a change is often
mandatory to achieve the full value of the proposed course of action.

6.7 How much money is needed to organiza?

To organize a single proprietorship business concern, there is no specific or mandatory provisions

in law and among administrative guidelines to point out that a certain amount is required to put up a sole
proprietorship business. In fact, in registering a business name, neither the DTI nor any of the

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 To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)
ENTREPRENEURSHIP (Applied Track Subject)
government entities including the lgus require a material evidence to prove that the entrepreneur has in
his possession the hard cash that is needed to organize and operationalize the business. The
entrepreneur, therefore is free to indicate in the registration form any amount of money as capital for the
business. In fairness to oneself, however, it is best to indicate in legal forms a certain amount of capital
that is deemed really needed in the business. This data will also serve as the basis for accounting
purposes which the entrepreneur anyway will be doing on an annual basis.

Unlike the sole proprietorship form of business, the case of a partnership and the corporation is
totally different. To begin with, the SEC requires a bank certification to the fact that indeed, the paid up
capital requirement as indicated in the incorporation papers is deposited in the bank – and the SEC
people do check this matter with the banks. Under the law, the minimum authorized capital requirement
for a corporation is ONE HUNDRED THOUSAND PESOS (Php100,000.00). following the 25/25 rule-,
25% of the authorized capital must be subscribed and of the subscribed capital, at least 25% must be
paid up – a corporation with an authorized capital of Php100,000.00 only requires a minimum hard cash
of about Php6,250.00 to be able to register a small-scale corporation. Given this miniscule amount plus
the cost of registration (1% of paid up capital) and other fees, a cash amount of less than Php10,000.00
to be shared by 5 incorporators (minimum required number of incorporators) can lead to the birth of a new
corporation.

6.8 The best form of ownership

The summary of the pros and cons of various forms of business organization shown on Table 6.1
on page 10 should give the prospective entrepreneur the chance to evaluate his options, a question as to
what form of business organization is the best to adapt arises. In choosing a form of ownership,
entrepreneurs must remember that there is no single “best” form of business organization as to
ownership. What is best depends on the individual’s circumstances and the long-term vision for the
business and several factors known only to the entrepreneur himself.

The following are just a few of the many questions to be answered that will help the entrepreneur in
determining which form is appropriate :

How much money is needed for the business or how much money is the entrepreneur willing
to put up?
What specific skills are at hand and how will they contribute to the success of the business?
Is the entrepreneur willing to share profits or does he or she wants to rake all the rewards?
What tax consideration are important?
Does the entrepreneur want to provide a continuity after his death?
What level of management and operational control does the entrepreneur want to have?
Is the entrepreneur willing to bear the bureaucratic red tape in structure organizations?
Is the entrepreneur after the ease of organizing the business venture only?
What is the nature of product or services to be handled by the business?