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.