CHAPTER 4: FORMS OF

BUSINESS ORGANIZATION
What are the forms
of Business
Organization?
There are 4 main types
of business organization: sole
proprietorship,partnership,corp
oration, and Limited Liability
Company, or LLC. Below, we give
an explanation of each of these
and how they are used in the
scope of business law.
 Sole proprietorship
• Business formed by a single individual.
• The simplest form under which a
business can operate.
• Unlike partnership and corporations,
business operating as sole
proprietorships do not have separate
legal existence from the owner
What are the
advantages of Sole
Proprietorship?
Ease of formation
-Sole proprietorship are much easier
to establish than other forms of
business organizations.
-Philippines, sole prop can register
in the local municipal hall.
-carindireas and sari-sari stores are
prevalent businesses operating as
sole proprietorships.
The owner has full
control of the business.
- the owner can single-handedly
decide on matters pertaining to the
business.
-sole proprietorship can easily make
decisions to solve problems faced by
the business.
- a sole proprietorship does not
experience internal conflict
regarding business decisions.
Owner can mix personal
and business assets
-Owners may freely mix their personal
assets with business assets.
-if business is experiencing
financialdifficulties, a sole proprietor may
use personal assets to help the business
revover.
Owner have all the profits for
themselves.

- All the profits generated by

a business operating as a
sole proprietorship belong
to the owner.
Sample toxation
- profits are considered
the income of the
owner.
DIS-ADVANTAGES OF A
SALE PROPRIETORSHIP
Unlimited liability

-An owner of a sole proprietorship is

personally liable for all debts incurred by
the business.
-means that creditors, customers, the
government and other outside parties can
go after business extinguishing all th assets
of the business in the satisfaction of their
claims.
Difficulty of raising
additional capital
- A sole proprietorship cannot sell interest.
(i.e., ownership rights) in the business.
-In case a sole proprietor does not have
enough resources to use as a capital, the
only remedy available to the business
- The workload of a sole proprietor is also
much heavier than the owners of other
forms of business organizations.
Review questions:
1. what is a sole proprietorship?
2. what are the advantages of a
sole proprietorship?
3. what are the disadvantages of
a sole proprietorship?
4. Based on your
understand of the topic,
what types of businesses
are most likely organized
as a sole proprietorship?
 What is
partnership?
- a Partnership is a contract whereby
two or more persons bind themselves
to contribute money , property , or
industry to a common fund , with the
intention of dividing the profits
among themselves. Two or more
persons may also form a partnership
for the exercise of a profession.
General features
of a partnership
Seperate legal existence
- a partnership can also be defined as an
artificial being created by operation of law.
Partnerships having judicial personalities
separate and distinct from their owners "(
called partners )". Being a artificial persons
, a partnership can perform the acts that the
partners can do expect those acts that are
purely personal in nature. A partnership can
also acquire property under its own name
Mutual agency
- mutual agency means that the acts
of a partner are binding on a
partnership even though he or she
has no authority to do so as long as
the act concerns the normal business
operations of the partnership.
Partnership is engaged in the
business of manufactoring clothes.
Unlimited liability
- partners are still liable for depts and
obligations that cannot paid by
partnership assets. Partnership is not
paid by the partnership assst ,
creditors can go after the personal
assets of andre , bart , and charles.
Limited life
- the life of a partnership can be easily ended
through partnership dissolution or liquidation.
Partnership dissolution occurs when one of the
partners withdraws from the partnership or if a new
partners is admitted. Dissolution occurs when there
is a change in the relationship among the partners.
Partnerships liquidation , on the other hand end the
operations of the partnership. During liquidation ,
partnership assets are sold , liabilities are paid , and
the remaining assets are distributed to the partners.
Co-ownership of
partnership property
- the contributed money and property
belong to the partnership and the
partners only have a proportionate
share of partnership assets.
Partnership agreement
- contracts are perfected through oral or written
agreement. Thus written contract is called the articles of
partnership , and it contains the following informations.
A. Name of the partnership.
B. Location of the principle office of the partnership.
C. The names , citizenships , and residence of the
partners.
D. Term for which the partnerships is to exist.
E. The purpose for which the partnerships is formed.
F. Original capital contibutions of the partners.
G. Profit and loss sharing agreement among the partners.
General features
of a corporation
Seperate legal existence
-just like a partnership, a corporation is a treated by
law as an artificial being seperate and distinct from
its owners. A corporation can enter into contracts
and transactions under its name. Owners or
stockholders are often involved in decision-making
through voting but this does not given them the right
to perform acts for the corporation. A corporation
has a management structure that us composed of
individuals with specific authorities.
Limited liability
-the limited liability characterictics is an
advantage a corporation has over a
partnership. The personal assets of the
stockholders of a corporation are protected
from the claims of creditors and other
outside parties. This characteristics is a
major consideration of aspiring
businessmen who do not want to be
exposed to too much risk.
Transferable ownership rights
-Ownership rights in a corporation are represented
by stocks. A stock is an intangible asset evidencing a
proportion share in the proporties of a corporation.
Stocks cab be transferred to other persons through,
sale, donation, or other modes of transfer. Stocksbof
a corporation can be transferred even wothout the
consent of other stockholders unless the
corporation is privately held.
Virtually Unlimited Life
- A corporation shall exist of a period not existing 50
years from the date itsbformation. Virtually unlimited
life as long as the stockholders want to continue
business operations. A corporation is also not
affected bythe withdrawal, death, and admission of
stockholders. The withdrawal, death, and admission
of stockholders, only change the composition of the
owners of a corporation, but these events do not
require the stockholders to formulate a new
agreement.
Corporation management
- The management structure of a
corporation is more complex than that of
the other forms of business organuzations.
Stockholders are the owners of a
corporation. The board of directors
represents the interest of the stockholders
and they are responsible for creating
operating policies for the company.
Government Regulations
-Corporation are subject to stricter
government regulation than sole
proprietorships and partnerships. -the
operations of corporations are closely
monitored by the government -The
bankruptcy of a large corporation can
cause the whole economy to spiral
downwards.
Double Taxation
-the income of a corporation is
taxed on the corporate level and
the individual level. -the income
of a sole proprietorship or a
partnership is part of the
individual income of the owners.
 Dividents
- The corporation is not the case for a
corporation.
-The corporation is not required to
ditribute to stockholders the income ,
it generated from operations. -
Dividents may be in form of cash,
stock or property.
 ADVANTAGES DIS- ADVANTAGES

• Ability to acquire • Heavily regulated

additional capital by the government
• Transferable • Double taxation
ownership rights
• Limited liability of • Not easy to form
stockholders
• Virtually unlimited • More expensive to
life form that sole
• Large pool of proprietorship and
human capital partnerships
Review Questions:
1. what is corporation? Explain the general
features of a corporation.
2. what are the advatages and
disadvantages of a corporation compared
to partnerships and sole partnerships?
3. illustrate and explain the general
structure of the management of a
corporation.
4. what are dividends? What are the
common types of dividends?
Advatages and disadvantages of
a General Partnership:
Advantages
- Easier to create than a corporation
- Better ability to acquire additional Capitl
than sole proprietorships
- Larger pool of human capital than sole
proprietorship
Disadvantages
- Unlimited
- Mutual agency
- Limited life
Other forms of a partnerahip
- the partnership we have just discussed is
called a general or regular partbership
there are th limited partnership limited
liability partnership and limited liability
company
Limited partnership
- in a limited partnership at least one
partner has unlimited liability and at least
one other has limited liability partnership
having unlimited are called general partners
while partners having limited liability are
called limited partners creditors cannot go
after his or her personal assets if
limited partner participate in the
management of the partnership he or
she losses the limited liability
protection he or she becomes a
general partners .
Limited liability Partnership
- the limited liability partnership is a
type of partnership that aims to
protect innocent partners from the
malpractice and wrong doings of
others partners the limited partners
liability partnership is mostly used by
individuals forming a partnership the
practice of a profession.
Limited liability company
- limited liability company is another form of
organization having partnership characters
limited liability companies have futures of
both a corporation and a partnership the
owners are called members and they enjoy
limited liability unlike the limited partners in
a limited partnership members of a limited
liability company can participate in
management without losing the limited
liability protection .
Advantages and Disadvantages
of a different forms of
partnership:
Form of partnership
- General Partnership
- Limited liability partnership
- limited partnership
- Limited liability company
Advantages
- simple and inexpensive to create and
operate
- limited partnership have a limited personal
liability for business depts as long as they
do not participate in management
- General partners can raise cash without
involving outside investor in management of
business
- Mostly of interest to partners in old
line profession such as law in
medicine and accounting
- owners partners are not personally
liable for the malpractice of others
partners
- Owners have limited personal
liability for business depts even i they
participate in management.
Disadvantages
- owners partners personality liable for
business debts
- general partners personally liable for
business debts
- more expensive to create than regular
partnership suiteble mainly for companies
that invest in real estate
- more expensive to create than regular
partnership.
Review Questions:
1. what is partnership?
2. what are the general features of a
partnership?
3. explain the advantages and
disadvantages of a partnership.
4. what are the articles of a partnership?
What is its purpose? Give examples of a
stipulations usually found in articles of
partnership.