FORM OF BUSINESS ORGANIZATION

Single or Sole Proprietorship. It is a form of business organization which is owned by one

person. The owner personally manages his business. Most of businesses in the Philippines
(including those which are not registered) belong to single proprietorship. Examples are retailers,
market vendors, barbers, tailors, and so forth.
a)

Advantages of Single or Sole Proprietorship

1)
It is easy to organize. Financial capital is small, and registration requirements are not
difficult to comply with. In fact, in the remote rural areas small businesses do not even bother to
apply for license.
2)
The single proprietor is the boss. He makes the decisions and enjoys substantial freedom
of action. Possibilities of conflicts or quarrels are minimized.
3)
The owner acquires all the profits from his business. This gives him more incentives to
make his business grow.
b)

Disadvantages of Single or Sole Proprietorship

1)
In general the financial resources of a single proprietorship are not enough to transform
the business into a large scale enterprise. Considering its small assets and high mortality rate,
banks are reluctant to grant big loans to single proprietorship type of business organizations.
2)
Benefits of specialization in business management are not present in small scale
proprietorship. There is only one manager. In not a few cases, the owner is the only employee.
3)
The owner has unlimited liability. This means that the owner of the business risks not only
the assets of his small enterprise, but also his other personal assets like his piece of land, bank
deposits, and other personal properties which are not part of his business. In case of loss, such
assets are subject to financial claims by creditors.
c)

Requirements for formation

Since it is the simplest form of business it is the easiest to register. It is registered through the
Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and
Industry (DTI).
Partnership. It is a form of business organization in which two or more persons agree to own
and operate a business. The partners agree to combine their resources (money, materials, and
management). They also share their profits and losses. However, there are silent partners. They
only provide the financial capital but they do not participate in the management. There is also the
industrial partner. He does not contribute money to the business organization but he is
responsible for its management.

Advantages of Partnership
1)
It is also easy to organize like single proprietorship. Legal red tape in connection with its
registration is not much.
2)
Better management because of the presence or more participants in the operations of the
business.
3)
Possibility of bigger resources than in the single proprietorship exists. Financial
institutions may extend bigger loans to such business organization considering the combined
resources of the partners.
Disadvantages of Partnership
1)
Conflicts or quarrels between or among the partners regarding the management or policies
of the business are likely to crop up. In fact, under Filipino style, some partners cheat their other
partners in matters of profits or expenses.
2)
It lacks stability. The death or withdrawal of one partner dissolves the partnership. To
continue its operation, a complete reorganization is needed.
3)
Like the single proprietor, the partners are also subject to unlimited liability, except the
limited partners. Such partners, liabilities are only confined to their share of capital contributions
in the form of cash or property.
c)

Requirements for formation

A partnership consists of two or more persons who bind themselves to contribute money or
industry to a common fund, with the intention of dividing the profits among themselves. The
most common example of partnerships are professional partnerships, like in the case of law firms
and accounting firms. Just like a corporation, it is registered with the Securities and Exchange
Commission (SEC).
A partnership, just like a corporation, is a juridical entity, which means that it has a personality
distinct and separate from that of its members. A partnership may be general or limited. In a
general partnership, the partners have unlimited liability for the debts and obligation of the
partnership, pretty much like a sole proprietorship. In a limited partnership, one or more general
partners have unlimited liability and the limited partners have liability only up to the amount of
their capital contributions. Unlike a corporation, which survives even when a
member/stockholder dies or gets out, a partnership is dissolved upon the death of a partner or
whenever a partner bolts out.
Cooperative. It is an organization composed primarily of small producers and consumers who
voluntarily join together to form business enterprises which they themselves own, control and
patronize.

A cooperative is also defined as a duly registered association of persons, with a common bond of
interest and have voluntarily joined together to achieve a lawful common social or economic
end, and making equitable contributions to the capital required and accepting a fair share of the
risks and benefits of the undertaking in accordance with universally accepted cooperative
principles.
Advantages of a Cooperative
The advantageous factors of the cooperative type of organization are given below: 1. Elimination of middlemen. The management of the consumer cooperative society directly
purchases the finished goods from the manufacturer and producer. Producer cooperative society
procures the raw material from the producer. Thus they try to free themselves from the grip of
the middlemen and make the goods available to consumers at lower prices.
2. Saving in management expenses. Cooperative society enjoys some economies in the field of
management due to voluntary services performed by the members themselves. Thus, it is
possible to minimize the expenses of management and supervision.
3. Minimum stock. Society purchases the same goods which are actually demanded by its
members. Thus there is need to have minimum stock at hand due to constant and regular
demands.
4. Economy in distribution and production expenditure. Society is saved from any distribution
and production expenses. It has got its regular customers; therefore society has not to face any
trouble for marketing its goods. Thus is has not to incur any expenditure for publicity and
advertisement, which is a big item in the budget of the capitalist producer.
5. Integration. Under this type of organization, complete integration between producers,
wholesalers and retailers is always possible. This is thus a clear advantage over capitalist
economy.
Disadvantages of a Cooperative
The following are the reasons of failure or defects and disadvantages of cooperative
organization.
1. Lack of capital.
a)
Its members are generally related to the poor group of the society and they are not in a
position to invest a large amount.
b)

External financial resources of the society are limited.

c)

It cannot borrow money from non-members.

d)

It cannot issue any kind of debentures.

e)

It share cannot be transferred to nonmembers.

1. It thus suffers shortage of capital for the operation of business.
2. Limited scale. Due to the various hindrances behind the growth of capital, it is not
possible for the cooperative society to start its business at a large scale; it therefore, keeps
its business limited in the narrow field of cooperation.
3. Inefficient management. Expert and efficient management is important factor for running
the business successfully. But a society cannot afford to hire the services of superior
abilities due to its limited resources. Therefore its business cannot be carried on smoothly.
4. Lack of prompt decision. As all the matters are decided by the management committee
and complied by another authority, it cannot act with promptness, if a chance comes to
make a timely purchase or sale, they have to wait to get others consent.

c)

Requirements for their formation

Organizing a cooperative can be complex and simple. It requires an understanding of the basic
needs of the prospective cooperative members. It demands patience from the organizer who must
make the cooperatives long-term goals and objectives, and its visions a real part of the
members lives.
But it can be too easy because the Cooperative Code of the Philippines (RA 6938) has devised
very clear-cut steps for the cooperative organizer and members. The following are the basic
information that the prospective members should understand before organizing a cooperative.
There are six steps suggested in setting up a cooperative.
Corporations. It is a company recognized by law as a single body with its own powers and
liabilities, separate from those of the individual members. Corporations perform many of the
functions of private business, governments, educational bodies, and the professions.
Advantages of a Corporation
1)
A member has unlimited liability. In case the corporation becomes bankrupt, only the
capital contributions of the members are affected. The other personal properties of the
stockholders of a corporation are excluded from financial claims of creditors of the corporation.
2)
It has the most effective means of raising money capital for its operations, by selling
stocks and bonds. Stocks are certificates of ownership while bonds are certificates of
indebtedness. These are financial institutions which specialize in helping a corporation sell its
securities (stocks and bonds).

3)
It has permanent existence. The life-span of a corporation is 50 years, and subject to
renewal for another 50 years. The death withdrawal of some officers and members does not
affect the existence of the corporation. The corporation can easily get officers or managers from
inside or outside the organization. Transfer of corporate ownership may take place any time
through a sale of stocks, but this does not disrupt the continuity of a corporation. As a legal
entity, the life of a corporation is independent from its owners and officials.
4)
It is capable of getting the most efficient management considering its huge resources and
large scale-corporations.
Disadvantages of a Corporation
1)
It is not easy to organize a corporation. Aside from complying with capital requirements,
there is much paperwork involved in securing a charter. A charter is a written document which
contains the objectives and activities of the corporation, among other things. It takes a longer
time to secure the approval of the Securities and Exchange Commission regarding the
organization and operation of a corporation.
2)
Abuses of corporation officials are likely to emerge in situations where many stockholders
do not participate actively in the affairs of their corporation. Not a few stockholders do not
exercise their voting rights during important meetings. Either, they are absent or they let others
cast their votes (proxy voting). Examples of abuses of corporate officials are large salaries and
fat allowances for them.
3)
Some corporations are engaged in questionable activities. For instance, they sell worthless
securities; they pollute the environment; or sell substandard goods. In short, they do not comply
with their social responsibility.
4)
There is a very impersonal or formal relationship between the officers and employees of a
corporation. In the case of single proprietorship and partnership, constant and close contact
between owners and employees create a very personal and friendly atmosphere. Everybody
knows everybody. In a giant corporation, it is not possible for the president or the board
chairman to meet personally all his employees in a year. His very valuable time is devoted to
planning and decision making.
c)

Requirements for their formation

A corporation is a juridical entity established under the Corporation Code and registered with the
SEC. It must be created by or composed of at least 5 natural persons (up to a maximum of 15),
technically called incorporators. Juridical persons, like other corporations or partnerships,
cannot be incorporators, although they may subsequenly purchase shares and become corporate
shareholders/stockholders.

Piercing the Corporate Veil: When LLCs and Corporations May be at Risk
key reason that business owners and managers choose to form a corporation
or limited liability company (LLC) is so that they won't be held personally
liable for debts should the business be unable to pay its creditors. But
sometimes courts will hold an LLC or corporation's owners, members, and
shareholders personally liable for business debts. When this happens it's
called "piercing the corporate veil."
Corporate Liability for Business Debts
Corporations and LLCs are legal entities, separate and distinct from the people who create and
own them (these people are called corporate shareholders or LLC members). One of the principal
advantages of forming a corporation or an LLC is that, because the corporation or LLC is
considered a separate entity (unlike partnerships and sole proprietorships), the owners and
managers have limited personal liability for the company's debts. This means that the people who
own and run the corporation or LLC cannot usually be held personally responsible for the debts
of the business. But, in certain situations, courts can ignore the limited liability status of a
corporation or LLC and hold its officers, directors, and shareholders or members personally
liable for its debts. When this happens, it is called piercing the corporate veil. Closely held
corporations and small LLCs are most likely to get their veils pierced (corporations that are
owned by one or just a few people are called closely held corporations, or close corporations for
short).
Effects of Piercing the Corporate Veil
If a court pierces a company's corporate veil, the owners, shareholders, or members of a
corporation or LLC can be held personally liable for corporate debts. This means creditors can
go after the owners' home, bank account, investments, and other assets to satisfy the corporate
debt. But courts will impose personal liability only on those individuals who are responsible for
the corporation or LLC's wrongful or fraudulent actions; they won't hold innocent parties
personally liable for company debts.
When Courts Will Pierce the Corporate Veil
Courts might pierce the corporate veil and impose personal liability on officers, directors,
shareholders, or members when all of the following are true.

There is no real separation between the company and its

owners. If the owners fail to maintain a formal legal separation
between their business and their personal financial affairs, a court
could find that the corporation or LLC is really just a sham (the owners'
alter ego) and that the owners are personally operating the business as
if the corporation or LLC didn't exist. For instance, if the owner pays

personal bills from the business checking account or ignores the legal
formalities that a corporation or LLC must follow (for example, by
making important corporate or LLC decisions without recording them in
minutes of a meeting), a court could decide that the owner isn't
entitled to the limited liability that the corporate business structure
would ordinarily provide.

The company's actions were wrongful or fraudulent. If the

owner(s) recklessly borrowed and lost money, made business deals
knowing the business couldn't pay the invoices, or otherwise acted
recklessly or dishonestly, a court could find financial fraud was
perpetrated and that the limited liability protection shouldn't apply.

The company's creditors suffered an unjust cost. If someone who

did business with the company is left with unpaid bills or an unpaid
court judgment and the above factors are present, a court will try to
correct this unfairness by piercing the veil.

Factors Courts Consider in Piercing the Corporate Veil

The most common factors that courts consider in determining whether to pierce the corporate
veil are:

whether the corporation or LLC engaged in fraudulent behavior

whether the corporation or LLC failed to follow corporate formalities

whether the corporation or LLC was inadequately capitalized (if the

corporation never had enough funds to operate, it was not really a
separate entity that could stand on its own), and

whether one person or a small group of closely related people were in

complete control of the corporation or LLC.