Chapter 5

Ownership and Organization

Introduction

This module teaches participants about different types of ownership and organization for starting
a business. It covers advantages and disadvantages of each type. While there is no universally perfect
form, the best choice depends on the entrepreneur's beliefs and preferences.

Things to consider in selecting the best legal form of organization

➢ Ownership
➢ Management
➢ Financing
➢ Liability
➢ Incentives
➢ Taxation
➢ Retention of Income
➢ Protection

Sole proprietorship

The sole proprietorship or single proprietorship is a form of business organization initiated,

organized, owned or capitalized, and managed by a single person.

Advantage

• Easily created and terminated. A sole proprietorship can be established informally and can be
easily terminated.
• Direct, undiluted action. One person holds ownership, control, and management authority.
• All rewards to ownership. The owner works for himself or herself and determines his or her own
destiny.
• Flexibility. The owner is free to adopt change readily.
• Minimum regulation and taxation. Proprietary is free from control.

Disadvantage

• Unlimited liability. Owners must be ready to use their personal assets to settle business debts if
the business cannot meet its obligations.
• Capital limitations. The owner's assets limit the equity capital, restricting growth and expansion
possibilities.
• Perils of individual. If the owner passes away or falls seriously ill, the business faces immediate
risk.
• Limited skills and capabilities of the sole owner. The business can only benefit from the owner's
skills and capabilities, which might not be sufficient for the business's requirements.
Partnership

A partnership is an association of two or more business partners who co-own a business for the
purpose of making 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.

Types of partnership

1. General partner: This partner shares ownership and manages the business, being liable to the extent of
their personal property after the partnership assets are used up.

2. Limited partners: These partners have limited financial liability and do not actively manage the business.
Their liability extends only to their capital contributions.

3. Silent partners: They are partners who do not participate in the business's operations but are known to
be affiliated with the business.

4. Dominant partner: These partners are not active in the partnership and are not usually recognized as
part of the business.

5. Capitalist partner: This partner contributes money or property to the partnership's common fund.

6. Managing partner: This partner is responsible for overseeing the business operations of the partnership.

7. Industrial partner: This partner offers knowledge or personal services to the partnership.

8. Secret partner: This partner actively participates in the business but is not publicly acknowledged as a
partner.

9. Nominal partner or partner by estoppel: This partner is not actually a partner but is represented or held
out as one.

10. Liquidating partner: This partner is tasked with finalizing or resolving the partnership's affairs following
dissolution.

Advantages

• Pooling of resources. Partnerships join people together to boost their business potential by
blending ideas, skills, money, and assets for successful ventures.
• Ability to obtain capital. Partners' combined finances support business loan talks, easing the
process of obtaining capital.
• Simplicity and incentive. Each partner is driven by the understanding that their contributions
influence the partnership's success, fostering a commitment to prioritize the business's
achievement over personal interests.
• Limited regulation and taxation. Like sole proprietorships, partnerships face minimal regulations
and are taxed based on partners' individual incomes.
Disadvantages

• Unlimited liability. All the partners are liable for the actions of each other.
• Tenuous existence. Partnerships face various uncertainties that could lead to their dissolution or
disruption. Events such as a partner's death, mental incapacity, or disagreements that cannot be
resolved may result in termination.
• Independence on management harmony and coordination. Partners may not agree on certain
matters.
• Problems in share liquidation. Selling a partner's share requires agreement from other partners
and selling it to an outsider without a proper valuation can lead to issues.

Corporation

A Corporation is an artificial being, invisible, intangible, and exist only in contemplation of law. Its
owners are the stockholders who can sell their interests in the corporation without affecting the
continuity of its operations because the life of the corporation is dependent on or distinct from that of
the owners or stockholders.

Advantages

• Limited liability. Stockholders are only liable for the amount they invest in the corporation.
• Legal entity. A corporation is legally separate, can own property, remains unaffected by changes
in stockholders, and is entitled to constitutional protections.
• Ready transferability of ownership. Stock shares can be easily sold or transferred.
• Obtaining capital. Establishing a corporation with a marketable idea allows for selling stock to
diverse investors, facilitating growth.
• Employee benefits. Corporations offer enhanced employee incentives like stock ownership,
bonuses, pension plans, insurance, and other perks with tax advantages more easily than other
business structures.

Disadvantages

• Legal formality and cost. Establishing a corporation demands substantial time, effort, and expense,
with stricter regulatory compliance compared to sole proprietorships or partnerships.
• Cost and time involved in the incorporation process. Due to the complexity involved in forming a
corporation with multiple individuals, the process is extended and more challenging, increasing
expenses and time commitments.
• Taxation. Corporations face specific tax regulations that are costlier in terms of national and local
taxation.
• Potential loss of control by founders of the corporation. The structure of a corporation and the
delineation of powers between owners/founders and managers can constrain and endanger the
authority of the founders or shareholders.
Cooperative

Republic Act 6938, also identified as the Cooperative Code of the Philippines, describes a
cooperative as a legally registered group of individuals sharing a common interest. They unite willingly to
pursue a legitimate social or economic goal, each contributing fairly to the necessary capital. Members
also agree to share both the risks and rewards of the endeavor based on universally recognized
cooperative principles.

Principles of Cooperative

• Open and voluntary membership. Anyone can join regardless of their background.
• Democratic control. Elected officials run the organization based on agreed rules. Members have
equal votes.
• Limited interest in capital. Capital gains limited interest.
• Division on net surplus. Profits are shared among members for development, services, funds, and
interest, as outlined in the rules.
• Cooperative education. Cooperatives must educate members and the public about cooperative
principles.
• Cooperation among cooperatives. Cooperatives collaborate locally and internationally for mutual
benefit.

Advantages and Disadvantages

• Tax privileges. Cooperatives often receive subsidies and favorable treatment in government-
backed initiatives for their members.
• Ability to provide direct benefits to its members and the entire community it serves in the form
of relatively cheaper products and services consistent with its mission of providing services, rather
than existence for purely profit motives.
• Inequality of profit distribution. Profits are allocated based on the number of shares, potentially
resulting in hardworking members receiving lower rewards compared to others.
• Cooperatives primarily support the masses or underprivileged, contrasting with entrepreneurial
objectives that target more affluent markets for profit maximization.

General requirement and procedures for registration

Prospective entrepreneurs must check with the government agencies concerned for updated or
revised administrative rules and policies, as well as recent legislative enactment that may have to be
complied with.

Registering a single proprietorship

• Register the business name with the Department of Trade and Industry under the Bureau of
Domestic Trade.
• 2 pcs. 2X2 picture
• Application fee or registration fee of P110.00
Registering a partnership

• Prepare partnership agreement

• File the partnership agreement with the SEC
• Pay filing fee
• Evaluation of the application by the lawyer and staff of Corporate and Legal Department
• Release of the approved registration is within 15-30 days.

Registering a corporation

• Prepare Articles of Incorporation and By-laws, bank certification

• File Articles of Incorporation and By-laws with the SEC
• Pay registration fee
• Evaluation of application by lawyer and staff of Corporate and Legal Department
• Release of approved registration is within 15-30 days.

Registering a cooperative

• The following documents shall be forwarded to CDA:

1. Four (4) copies of the economic survey with a general statement describing briefly the structure,
purpose, eco- nomic feasibility, area of operation, size of membership, and other pertinent data
2. Four (4) copies of Articles of Incorporation together with the bond of accountable officers
3. Four (4) copies of By-laws
4. Registration fee as prescribed by CDA
Dealing with local government units

The papers from DTI, SEC, and CDA are national instruments. After complying with national
agencies, local government units gain administrative control and can create legislation and ordinances
relevant to their area. This affects business registrants who must comply with local permits and clearances
to operate and open to the public. This includes:

1. Mayor's permit
2. Building permit
3. Sanitary permit
4. Cigar and liquor permit
5. NBI clearance
6. Barangay clearance

Dealing with other government and private bodies

Agencies like DENR and DepEd may have to be consulted for their requirements to the registering
organization. The entrepreneur's own neighborhood may likewise oppose a business proposition within
the village or subdivision.
How much money is needed?

There is no specific law for setting up a sole proprietorship. Unlike in partnership and corporation,
the Securities and Exchange Commission requires a bank certification confirming that the required capital
is deposited. The minimum authorized capital for a corporation is ₱100,000, with 25% to be subscribed
and at least 25% to be paid up.