Week-5-6_Preparing-a-Business

Preparing a Business

  • Instructor: Marla V. Relloso

Forms of Business Organization

What is a Business Organization?

  • The structure of a business, referring to a commercial or industrial enterprise and the people involved.

Types of Business Organization

  • Sole Proprietorship

  • Partnership

  • Joint Stock Company

  • Co-operative Society

  • Public Sector Enterprises

  • Joint Sector

Sole Proprietorship

  • Owned, managed, and controlled by a single individual.

  • Simplest and most common form of business organization.

Self-Employed Business Owner

  • Engages in trade or business intending to make a profit (full-time or part-time).

Franchise as a Type of Sole Proprietorship

  • Franchisee pays a fee to the franchisor to use the brand and follows a business model.

  • Obligated to follow guidelines for operations, marketing, and expansion.

  • Provides a good choice for inexperienced business owners due to support provided by the franchisor.

Advantages of Sole Proprietorship

  • Easy to start with no registration required.

  • No profit sharing; all profits go to the owner.

  • Decision-making is straightforward.

  • Simple to wind up.

  • Business secrets remain confidential.

  • No corporate taxes apply.

Disadvantages of Sole Proprietorship

  • Unlimited liability; personal assets may be at risk.

  • Employee benefits (e.g., medical insurance) are not tax deductible.

  • Challenges in raising funds.

  • Limited lifespan; business dies with the owner.

  • Loss of business in absence of the owner.

Partnership

  • Formed by two or more people contributing to a common fund for profit.

  • Each partner may contribute money, property, or industry.

  • Governed by Article 1767 of the Civil Code.

Types of Partners

  • General Partners: Participate in operations and liable for debts.

  • Limited Partners: Invest without active management and have limited liability.

General Partnership

  • Association of two or more co-owners aiming for profit; equal management rights unless specified.

  • Partners are liable for debts and actions of others in the partnership.

Limited Partnership

  • Formation includes one or more general partners managing the business and limited partners with specific contributions.

Limited Liability Partnership (LLP)

  • Protects partners from personal liability for the partnership's debts.

  • Offers similar taxation benefits as general partnerships.

Advantages of General Partnership

  • Easier to create than a corporation.

  • Improved ability to obtain capital compared to sole proprietorships.

  • Larger pool of human resources.

Disadvantages of General Partnership

  • Unlimited liability for general partners.

  • Mutual agency: actions of one partner can affect all.

  • Limited lifespan similar to sole proprietorship.

Corporation

  • An artificial entity defined by law with rights and properties as per the Corporation Code of the Philippines (B.P. Blg. 68).

  • Various types classified by purpose, taxation, number of shareholders, and profit orientation.

Business Corporation

  • Formed for commercial activity aimed at profit.

Types of Corporations

  • C Corporation: Taxation occurs at the corporate level, with income not passed to shareholders.

  • Close Corporation: Stock held by a few individuals, often family-based.

  • Controlled Corporation: Majority stock holds by one individual or company.

  • Cooperative Corporation: Created for serving member interests, profits are shared among members.

  • Non-Profit Corporation: Organized for purposes other than profit; enjoys special tax treatment.

  • Private Corporation: For non-public purposes like manufacturing.

  • Public Corporation: Owned by the government, serving public interests.

  • S Corporation: Passes income directly to shareholders to avoid double taxation.

Advantages of Corporations

  • Ability to acquire additional capital.

  • Transferable ownership rights through shares.

  • Limited liability protects personal assets of shareholders.

  • Potential for perpetuity (unlimited lifespan).

  • Access to a large pool of human resources.

Disadvantages of Corporations

  • Heavily regulated by government laws.

  • Subject to double taxation (corporate and individual level).

  • More complex and costly to form than sole proprietorships and partnerships.

Cooperative

  • Registered association of people with common interests aiming for social or economic benefit.

  • Members share risks and rewards according to cooperative principles.

Types of Cooperative

  • Credit Cooperative: Facilitates savings and lending among members.

  • Consumer Cooperative: Distributes goods to members and non-members.

  • Marketing Cooperative: Supplies production inputs for members and markets products.

  • Service Cooperative: Engages in providing various services (e.g., health, transportation).

  • Producer's Cooperative: Engaged in joint production efforts.

  • Multipurpose Cooperative: Combines multiple types of cooperative activities.

Advantages of Cooperatives

  • Group purchasing power enhances economies of scale.

  • Limited liability protections.

  • Potential tax exemptions applicable.

Disadvantages of Cooperatives

  • Decision-making must go through a board and general membership, which can slow progress.

Comparison of Business Types

Sole Proprietorship

  • Liability: Unlimited

  • Tax Treatment: Individual rates; 5%-32%

  • Control: Complete control by the owner.

  • Ease of Raising Capital: Limited to owner’s creditworthiness.

Partnership/Joint Ventures

  • Liability: Personal liability for debts.

  • Tax Treatment: Generally fixed at 30% of net income.

  • Control: Majority partners manage.

Corporation

  • Liability: Limited liability for shareholders.

  • Tax Treatment: Generally fixed at 30% of net income.

  • Control: Managed by a Board of Directors elected by shareholders.

Types of Business According to Activity

  • Service: Provides intangible products/services.

  • Merchandising/Trading: Buys finished goods to resell.

  • Manufacturing: Produces and sells own goods.

Summary of Business Types

  1. Service Firms: Utilize employees to offer services; intangible output.

    • Examples: Accounting firms, schools.

  2. Merchandising Firms: Buy and resell goods; tangible output.

    • Examples: Supermarkets, bookstores.

  3. Manufacturing Firms: Create goods from raw materials; tangible output.

    • Examples: Car manufacturers, electronics firms.

Micro, Small, and Medium Enterprises (MSMEs)

  • MSMEs defined by asset size and other factors (e.g., employee count).

  • Categories:

    • Micro: Below P3 million.

    • Small: P3 million to P15 million.

    • Medium: P15 million to P100 million.

    • Large: Above P100 million.

Role and Importance of MSMEs

  • Crucial for economic development, rural industrialization, and job creation.

  • Support equitable income distribution, utilization of local resources, and promote entrepreneurship.

Contribution to the Economy

  • Ensure wealth creation and income generation in all areas.

  • Provide continuous innovative ideas for competition.

Exports Contribution

  • Account for 25% of total export revenue, with 60% of exporters classified as MSMEs.

Deficiencies in SME Statistics

  1. Timeliness: Delayed reporting affects decision-making.

  2. Cross-compatibility: Different classification standards internationally.

  3. Inadequateness: Limited scope of data collected.

  4. Availability: Confidentiality limits access to firm-level data.

  5. Coverage: Underground economy statistics are insufficient.

Current Initiatives to Develop SME Statistics

  1. National Business Registration (NBR) Project: Aims to consolidate registered business information.

  2. SME Database: Designed to track government assistance to SMEs.

Business Regulations & Minimum Wage Compliance

  • Businesses may be exempt from minimum wage if conditions are met (e.g., less than 10 employees).

  • Fines and penalties for non-compliance with minimum wage laws.

Compensation and Wage Computation

  • Monthly Paid Employees & Daily-Paid Employees: Different computation methods for wage calculation.

  • Workers paid by results are entitled to minimum wage regardless of employment structure.

Employment Incentives

  • Premium pay for holiday work; special considerations for managerial staff.

  • Compliance with wage regulations is mandatory.

Enterprise Growth and Expansion Strategies

  • Market Penetration Strategy: Increase market share in existing markets.

  • Market Expansion: Enter new markets with current products.

  • Product Expansion: Introduce new products in existing markets.

  • Diversification: Launch new products in new markets; riskier approach.

  • Acquisition: Buy other companies to expand operations.

Conceptualization Process for Business

  • Steps from idea to opportunity to business concept; understanding customer needs and feasibility are critical.

Why Concepts Fail

  • Lack of understanding of customer needs and storytelling.

Feasibility Analysis

  • Industry, market, product assessments, team evaluation, and financial analysis.

Timeline to Start-Up

  • Assess feasibility and create a timeline for necessary activities to launch.

Setting Up an Enterprise

  • Involves a structured process including project selection, technology arrangement, financing, clearances, and quality certification.

Steps in Starting a Business

  1. Project Selection

  2. Technology and Machinery

  3. Arranging Finance

  4. Unit Development

  5. Filing Entrepreneurs' Memorandum

  6. Regulatory Approvals

  7. Quality Certification

Summary

  • Setting up a business is a complex process involving several stages, from identifying opportunities to implementing the business plan. Detailed attention to regulatory and quality assurance is key for success.

Generating Business Ideas

  • Observations of markets, prospective consumers, and innovations to identify feasible project ideas.

  • Evaluating resource compatibility and ensuring potential demand are essential before proceeding with business plans.