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Lesson 1 The Nature and Forms of Business Organizations

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19 views2 pages

Lesson 1 The Nature and Forms of Business Organizations

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jay yoro
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Nature and Forms of Business Organizations

A business is an active process which is an integral part of human society. It is an organization


where economic resources or inputs, such as materials and services, are brought together and
distributed to deliver or to give consumers goods, products, or outputs. It involves significant
operations such as buying, assembling, distributing, advertising, selling, and accounting.

Most businesses aim to earn profit. The term profit refers to the difference between the amount
received and the amount spent on something purchased, produced, or manufactured. The
fundamental reason for examining business activities from a moral point of view is that business
organizations should, in principle, help promote the common good and protect the rights and
interests of individuals.

Three types of business organizations are generally operated for profit - service,
merchandising, and manufacturing businesses.

Service businesses provide services to customers rather than products.


Examples: computer repair, laundry services, tutoring, delivery services, wellness (such as gym
or spa), etc.

Merchandising businesses sell to customers products they buy from other businesses.
Examples: sari-sari stores, bookstores, department stores, groceries, supermarkets, etc.

Manufacturing businesses turn basic inputs into products which are sold to consumers.
Examples: shoe manufacturing, baked goods, candle manufacturing, cosmetics manufacturing,
wine production, etc.

Forms of Business Organizations


1. Sole Proprietorship- It is a one-person business. The owner has full control over the
finances and operations and decides alone.

Advantages:
a. Tax preparation is faster. Simply file an individual income tax return including losses and
profits to your business. Your personal and business income is considered the same and the tax
implications for self-employed individuals would apply.
b. Sole proprietorship has lower start-up costs.
c. Handling money for the business is easier.
d. Sole proprietorships have the least government rules and regulations that affect them.
e. The sole proprietor can own the business for as long as he/she wants, and when he/she wants
to move out, he/she can cash in and sell the business.
f. Even in common practice, the sole proprietor can pass the business down to his/her heir.

Disadvantages:
a. The sole proprietor is personally liable for all debts and actions of the enterprise.
b. There is lack of financial control because of looser structure of sole proprietorship.
c. There could be difficulty in raising capital.

2. Partnership- It is a business relationship between two or more people. It refers to an


arrangement where individuals share a business venture's profits and liabilities. The partners
give feedback on how to use the capital and other critical strategic decisions that may provide
different perspectives.

Advantages:
a. Partnership business lacks formality as compared with managing a limited company or
corporation.
b. It is easy to start. The partnership may be created either verbally or in writing.
c. You share the burden. You have companion and support.
d. Every partner would add his/her own expertise, skills, experience, and connections to the
business, thus giving it a greater chance of success.
e. There is better decision-making. Two heads are better than one.
f. There is privacy. The business deals may be kept confidential by the partners.
g. The partners own and control the business.
h. The more partners there are, the more funds are available in the company, which can be used
for possible expansion. Its borrowing capacity is also likely to be higher.
i. There is an easy access to profits in a business partnership. The partners just have to divide
the profits.
Disadvantages:
a. The business does not have any independent legal status.
b. The business has no separate legal personality, so the partners are personally liable for the
debts and losses incurred.
c. The partnership business often seems to lack the sense of prestige more closely associated
with a corporation.
d. A partnership will often find it more difficult to raise money than a corporation.
e. There is a potential of differences and conflicts.
f. Decision-making can be slower because there is a need for consultation among partners.
g. The profit must be shared among the partners.
h. It may require a lot of time and energy thus may affect life-work balance.
i. The profits earned by the partnership will be translated to income on the individual partners.
Thus, they are subject to income tax in the financial year in which they are made.
j. There are limits on business development like unlimited liability, lack of funding opportunities,
and a lack of commercial status, etc.

3. Corporation. It is an entity created by law that is independent and distinct from its owners
and relies on the corporate laws of the state in which it is incorporated to continue its existence.
Corporations have an advantage in generating money for the company. It can raise funds by
selling shares of stocks. It files taxes separately from its owners.

Advantages:
a. The liability of the shareholders of a corporation is limited up to the amount of their
investments.
b. A publicly held corporation may sell shares or issue bonds to raise substantial amounts.
c. It is easy for a shareholder to sell shares in a corporation.
d. A corporation’s life has no limit; ownership can pass through many generations.

Disadvantages:
a. The corporation pays taxes on its income depending on its type and the shareholders pay
dividend taxes, so income gets taxed twice.
b. The management team of a corporation can operate the business without any real oversight
from the owners.

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