A business organization may take the form of a proprietorship, partnership, or corporation. Each of these forms and their major characteristics are listed below.
The three types of businesses we discussed earlier—service, merchandising, and manufacturing—may be organized as proprietorships, partnerships, or corporations. Given the large size and huge amount of resources required to operate a manufacturing business, most manufacturing businesses, such as San Miguel Corporation, are corporations. Most large retailers like SM Supermalls, Robinsons, and Ayala Mails are also corporations.
1. Sole Proprietorship
This is a business owned by one person.
- Advantages of a sole proprietorship: (a) total undivided authority; (b) low organizational cost and license fees; (c) tax savings; and (d) no restrictions on type of business (as long as it is legal).
- Disadvantages of a sole proprietorship: (a) unlimited liability; (b) limitation on size (and thus on fund-raising power); and (c) limited by management’s ability to be jack-of-all-trades.
2. Partnership
This is an association of two or more people as partners; it refers to an arrangement in which the individuals share the profits and liabilities of a business venture. Its chief characteristics are: (a) association of individuals; (b) mutual agency; (c) limited life; (d) unlimited liability; and (e) co-ownership of property.
The association of individuals in a partnership may be based on as simple an act as a handshake; however, it is preferable to state the agreement in writing.
- A partnership is a legal entity for certain purposes.
- A partnership is an accounting entity for financial reporting purposes.
- Net income of a partnership is not taxed as a separate entity.
Mutual agency means that an act of any partner is binding on all other partners, so long as the act appears to be appropriate for the partnership. This is true even when partners act beyond the scope of their authority. Partnerships have a limited life. Partnership dissolution occurs whenever a partner withdraws or a new partner is admitted.
Each partner has unlimited liability. Each partner is personally and individually liable for all partnership liabilities. Creditors’ claims attach first to partnership assets and then to the personal resources of any partner, irrespective of that partner’s capital equity in the company.
3. Corporation
It is an entity created by law that is separate and distinct from its owners and its continued existence is dependent upon the corporate statutes of the state in which it is incorporated.
The characteristics that distinguish a corporation from proprietorships and partnerships are:
- The corporation has separate legal.existence from its owners.
- The stockholders have limited liability.
- Transferable ownership rights (ownership is in shares of stock).
- Ability to obtain capital (relative ease).
- The corporation can have a continuous life.
- The corporation is subject to numerous government regulations.
- The corporation must pay an income tax on its earnings, and the stockholders are required to pay taxes on the dividends they receive: the result is double taxation of distributed earnings.
- An artificial/juridical “person” endowed with the ability for self-management, that is, the management structure is at the discretion of the board of directors.
The first step in forming a corporation is to file an application of incorporation with the government (in the Philippines, this is done through the Securities and Exchange Commission or SEC). After the application of incorporation has been approved, the corporation is granted a charter or articles of incorporation. The articles of incorporation formally create the corporation. The corporate management and board of directors then prepare a set of bylaws, which are the rules and procedures for conducting the corporation’s affairs. Costs may be incurred in organizing a corporation. These costs include legal fees, taxes, state incorporation fees, license fees, and promotional costs. Such costs are considered Organizational Expenses (Weygandt, Kieso, and Kimmel, 2012).