1-Business Structures Notes

What is a Business Structure?

  • A business structure, also called a business form, business entity, or organization, is a legal and organizational framework under which a particular business operates.
  • It defines the type of business ownership, management, liability, and taxation.

Key Considerations When Choosing the Right Business Structure

  • Ease of setting up
  • Capital requirements
  • Liability
  • Management style
  • Tax implications

Forms of Business

1. Sole Proprietorship

  • The simplest and most straightforward business structure.
  • The owner or proprietor has complete control over all aspects of the business.
  • There is no legal distinction between the owner and the business.
  • The owner receives all profits, bears all the losses, and takes liability for all debts and obligations incurred by the business.
  • Requires registration with the Department of Trade and Industry (DTI).
  • Comes with minimal regulatory requirements and administrative burden.
Disadvantages:
  • Unlimited Personal Liability: Personal assets are at risk if the business faces financial difficulties, debts, and other legal obligations.
  • Limited Access to Capital: Often limited to the owner's personal resources and loans; struggles to attract significant investment or secure substantial loans.
Ideal For:
  • Small businesses or solo entrepreneurs who want to test their business ideas.
  • Requires minimal paperwork and low initial capital requirements.
  • The owner or proprietor has to decide, oversee, or even do most of the business activities - from product development to marketing and sales.

2. Partnership

  • A business structure in which two or more individuals (or entities), known as partners, come together to operate a business for profit.
  • Partners share material and non-material resources.
  • Distribute the responsibilities, liabilities, gains, and losses among themselves.
  • A legal agreement is imperative to outline the terms and conditions governing the business relationships.
  • May be general or limited in regard to the liability of the partners.
Advantages:
  • Shared Responsibility and Resources: Partners can pool their resources, including capital, skills, and expertise.
  • Duties and responsibilities are normally distributed among partners, and these can lead to more effective business management.
  • More Access to Capital: Partnerships can raise more capital than a sole proprietor alone, which can be used for initial operations, expansions, and other opportunities.
  • Diverse Expertise and Perspectives: Partnerships benefit from the varied skills, knowledge, and expertise of each partner, leading to better decision-making, more innovative solutions, and a broader range of ideas.

3. Corporation

  • A business structure or juridical entity that is separate and distinct from its owners (shareholders).
  • Has its own rights, privileges, and liabilities.
  • Has the legal capacity to enter into contracts, own property, and incur debts in its own name independently of its shareholders.
  • Typically subject to stringent regulatory requirements, such as regular financial reporting and strict compliance with corporate laws and regulations.
  • Managed by a Board of Directors duly elected by the shareholders.
  • Can continue to exist beyond the lifetime of the founders or incorporators.
Advantages:
  • Limited Liability: Shareholders have limited liability, where their personal assets are generally protected from the debts and legal obligations of the corporation.
  • Enhanced Capital-Raising Potential: Corporations have the most access to business capital by issuing and selling shares of stocks to investors. The proceeds may be used for expansion and development.
  • Perpetual Succession: Corporations may continue to exist regardless of changes in ownership or the lifespan of incorporators, ensuring stability and continuity.
Disadvantages:
  • Complex and Costly Setup: Company incorporations involve the most complex and costly processes among all other business structures, including extensive legal and financial documentations, high registration costs, and lengthy approval timelines.
  • Regulatory and Compliance Requirements: Corporations are governed by the Revised Corporation Code (RCC) of the Philippines and are subject to strict regulatory requirements and compliance obligations. Regular financial reporting, audits, and adherence to corporate governance standards must always be observed.
  • Complex Taxation: Corporations often face complex taxation, sometimes double, where the company's profits are taxed at the corporate level while shareholders are taxed again on dividends or distributions.

4. One Person Corporation (OPC)

  • A business structure in the Philippines, introduced in the Revised Corporation Code of the Philippines (R.A. 11232), that allows a single individual or stockholder to create and operate a corporation.
  • Combines the benefits of limited liability and simplicity of a sole proprietorship.
  • Requires registration and compliance with the Securities and Exchange Commission (SEC).
  • Has its own legal personality distinct from the owner, who is the single stockholder, sole incorporator, director, and president.
Advantages:
  • Limited Liability Protection: The personal assets of the single stockholder are separate from the corporate entity, therefore, they are usually not at risk even if the business suffers from financial difficulties or debts.
  • Complete Business Control: The sole stockholder and president has full control over all aspects of business operations, making decision-making and implementation of plans easier.
  • Perpetual Existence: OPC can continue to exist even if the Sole shareholder/Director change.
Disadvantages:
  • Limited Scope for Growth: OPCs may find it challenging to raise substantial capital given the single-stockholder arrangement and financial institutions may be reluctant to issue business loans for expansions.
  • Increased Regulatory Requirements: OPCs must adhere to stringent corporate compliance and reportorial requirements. These include regular financial reporting, audits, and corporate governance standards, which can be burdensome for a sole owner or require additional costs and resources.
  • Potential for Limited Expertise: OPCs rely on the decisions of the single stockholder which might impact business negatively due to lack of experience.

5. Cooperative

  • As defined by the Cooperative Development Authority (CDA), a cooperative is "an autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and accepting a fair share of risks and benefits of the undertaking in accordance with the universally accepted cooperative principles."
  • A business structure owned and run by its members, who come and work together to achieve collective goals through a jointly-owned and democratically-controlled enterprise.
Advantages:
  • Democratic Control: Members are typically given equal voting rights and participation in decision-making processes.
  • Shared Benefits: Cooperatives promote equitable sharing of financial gains and benefits among the members based on their patronage of the services or their levels of participation.
  • Community Focus: Formed not just for the benefit of the direct members but also to serve local or specific communities and sectors.
Disadvantages:
  • Decision-Making Challenges: Cooperatives often face slow decision-making processes amidst the fast-paced business environments given that decisions require consensus or a majority vote from all the members.
  • Limited Access to Capital: Cooperatives do not issue shares of stocks while their capitalization mostly comes from member contributions, there can be restrictions in terms of expansion or funding large- scale projects.
  • Potential for Conflicts: Involve many people who may have different opinions and interests on certain matters, these may result in complicated issues that may impact the cooperatives operations.

Other Business Structures

Branch Offices

  • An extension of a foreign company that operates and conducts business in another country.
  • Legally considered part of the parent company or its headquarters but subject to another country's laws and regulations, corporate compliance requirements, and taxation.
  • Example: IT-BPO companies (ePerformax).

Representative Offices

  • Cannot directly generate revenue or engage in profit-making business activities.
  • May only serve as a liaison between the foreign company and the local market.
  • Mostly engage in market research, product and service promotions, and provision of information to potential clients.
  • Example: Foreign bank (DBS Bank in Makati).

Regional Headquarters (RHQ)

  • A corporate office or administrative branch set up by a foreign company in a particular region.
  • While not permitted to generate income, its primary function is to oversee, manage, inspect, and coordinate the company's branch offices, affiliates, and subsidiaries within the jurisdiction.
  • Example: San Miguel Corporations (Iloilo).

Regional Operating Headquarters (ROHQ)

  • Permitted to generate income in another country on top of the basic functions of a headquarters.
  • Centralizes operational functions such as logistics, supply chain management, and business development.
  • Example: PayPal.