Forms of Business Organization and Classification Comprehensive Notes

Overview of Business Organizations

Businesses are essential components of the economy, and as a student of Accountancy, Business, and Management (ABM), understanding how to structure a venture is critical. A business organization can be classified based on three primary criteria:

Ownership structure
Business activities
Asset size

When planning a future business, entrepreneurs must consider several factors during the planning phase:

The number of co-owners desired.
The specific products and services to be offered.
The amount of capital required for establishment and operation.

Classification According to Ownership Structure

Sole Proprietorship

A sole proprietorship is the simplest and easiest form of business organization to establish. It is characterized by having only one owner who has full control and authority over the enterprise.

Regulation: In the Philippines, sole proprietorships are regulated by the Department of Trade and Industry (DTI).
Advantages:
- Ease and low cost of formation.
- Direct distribution of profit (the owner receives all profits).
- Direct control over all business decisions.
- Tax benefits.
Disadvantages:
- Unlimited Liability: The owner is personally responsible for all business debts; personal assets can be seized to pay creditors.
- Difficulty in raising funds/capital.
- Lack of business continuity (the death or ill-health of the owner may lead to liquidation).
- Difficulty in attracting highly skilled employees.

Partnership

A partnership pertains to an agreement where two or more individuals (called partners) share the ownership of a business and its finances. This form of organization possesses a "juridical personality," meaning it is a legal entity separate from the individual partners.

Regulation: Partnerships are strictly regulated by the Civil Code of the Philippines and the Securities and Exchange Commission (SEC).
Liability Structures:
- General Partnership: Partners are liable for partnership debts up to their personal property.
- Limited Partnership: The liability of a limited partner is restricted only to their actual contribution or investment in the partnership. If a business incurs losses beyond its assets, general partners remain personally liable for those obligations.
Advantages:
- More sources of capital compared to a sole proprietorship.
- Shared responsibilities and losses.
- Access to varied skills and collaborative decision-making.
- Existence of a juridical personality.
Disadvantages:
- Limited life (the partnership can be dissolved easily).
- Unlimited liability for general partners.
- Difficulty in transferring ownership.
- Divided profits.
- Potential for disagreements among partners.

Types of Partnership

Partnerships can be categorized based on several dimensions:

According to liability: General and Limited.
According to the nature of the contribution: Capitalist (provides money/property) and Industrial (provides services/labor).
According to knowledge by the public: Ostensible (known to the public) and Secret (existence or partner's identity is hidden).
According to connection with partnership: Real (actual partners) and Nominal (partners in name only to allow the use of their name/influence).

Corporation

A corporation is a legal entity that is entirely separate and distinct from its owners, possessing its own juridical personality. It is owned by shareholders whose ownership is divided into shares of stocks.

Ownership: A corporation typically has a minimum of five and a maximum of $15$ owners (incorporators/shareholders).
Regulation: Corporations are strictly regulated by the Corporation Code of the Philippines (RA 11232) and the SEC.
Advantages:
- Greater sources of funds through the issuance of stock.
- Limited Liability: Shareholders are only liable up to the amount of their investment.
- Ease of transfer of ownership.
- Continuity of existence (perpetual succession).
- Centralized management through a Board of Directors.
Disadvantages:
- Complicated and expensive to form and operate.
- High costs of formation.
- Strict government regulation and reporting requirements.

Types of Corporation

According to purpose: For-profit and non-profit.
According to nationality: Domestic (incorporated under Philippine laws) and foreign (incorporated under laws of another country).
According to extent of membership: Open (shares available to the public) and close (shares held by a limited number of people).

Classification According to Business Activities

Service Business

This type of business focuses on providing assistance, help, and support to clients. The product is defined as nonphysical or intangible.

Measurement: Performance is measured in terms of quality, appeal, and the treatment received by customers.
Types and Examples:
- Hospitality services: Hotels and travel agencies.
- Repair services: Car repair, computer repair, and shoe or bag repair.
- Lifestyle-related services: Beauty salons, gyms, wellness centers, and laundry shops.
- Education and training services: Schools and tutorial services.
- Rental services: Internet shops and car rentals.
- Professional services: Medical checkups, accounting services, management consultancy, and engineering services.

Manufacturing Business

Manufacturing pertains to business organizations that convert inputs into finished goods or outputs. The production process involves the "4 Ms":

Manpower: Employees and labor.
Material: Raw materials needed for production.
Machines: Equipment and technology.
Method: The production process or system used.

Merchandising Business

This business model involves purchasing products from other businesses and selling them to customers at a higher price (markup) to generate profit.

Types and Examples:
- Store-based merchandising: Convenience stores, grocery stores, supermarkets, department stores, and sari-sari stores.
- Online merchandising: E-commerce applications and social media selling.
- Non-Store merchandising: Catalogs, brochures, mail, television home shopping, vending machines, and direct selling.

Hybrid Business

A hybrid business combines the characteristics of service, manufacturing, and merchandising organizations. It typically produces and sells products simultaneously (e.g., a restaurant that manufactures food and provides service).

Classification According to Asset Size

Under Republic Act 9178, also known as the Barangay Micro Business Enterprises (BMBE) Act, businesses are categorized based on their asset size and the number of employees.

Category	Asset Size	Number of Employees
Micro-enterprises	Up to $\text{Php } 3,000,000$	$1$ to $9$ employees
Small enterprises	$\text{Php } 3,000,001$ to $\text{Php } 15,000,000$	$10$ to $99$ employees
Medium enterprises	$\text{Php } 15,000,001$ to $\text{Php } 100,000,000$	$100$ to $199$ employees
Large enterprises	$\text{Php } 100,000,001$ and above	$200$ and above employees

Questions & Discussion

Reflective Questions:

Why is it important to consider the number of owners before you establish your business venture?
Why do some organizations opt to be a hybrid business?

Self-Assessment (True or False):

Manufacturing involves the process of reselling goods at a higher price. (False - This describes Merchandising; Manufacturing involves converting raw inputs into finished goods).
There is a greater source of funds and capital in a partnership compared to a sole proprietorship. (True).
There is no minimum capital requirement to form a corporation in the Philippines. (True - per RA 11232, though specific industries may have requirements).
There should be at least one general partner if you want to establish a partnership. (True - to handle the liability aspects).
The death or ill-health of the sole proprietor will mean liquidation of the business. (True - due to the lack of business continuity in this form).