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Unit 1: The Role of Business in Social and Economic Development

This document discusses different forms of business organization including sole proprietorships, partnerships, and corporations. It provides an overview of the key characteristics and advantages/disadvantages of each form. The document also discusses how different sized businesses can benefit from different organizational structures and how incorporating can help businesses access more funding but also means giving up some control.

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Ma District
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127 views

Unit 1: The Role of Business in Social and Economic Development

This document discusses different forms of business organization including sole proprietorships, partnerships, and corporations. It provides an overview of the key characteristics and advantages/disadvantages of each form. The document also discusses how different sized businesses can benefit from different organizational structures and how incorporating can help businesses access more funding but also means giving up some control.

Uploaded by

Ma District
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Unit 1: The Role of Business in Social and Economic

Development

Module 1: The Nature and Forms of Business


Organization

In this module, learners will be able to:


 Define and describe business and business organization
 Identify and describe the various forms of business organization
 Differentiate the forms of business organization in terms of their purpose
and role in socio-economic development
 Illustrate the role of each form of business organization in the economy

Business and Business Organization


A business is an activity that is part and parcel of human society. It is an
entity in which economic resources or inputs, such as materials and labor, are
put together and processed to provide goods or services or outputs to
customers. Business are usually complex enterprises involving major activities
like purchasing, manufacturing, marketing, advertising, selling, and
accounting. The objective of most businesses is to earn profit although this is
not the only aim for the operation of some businesses. Profit is the difference
between the amount earned and the amount spent in buying, operating, or
producing something. In this text, we focus on business operating to earn
profit, even though many of the same concepts and principles also apply to
not-for-profit organizations. The fundamental reason for examining the
activities of the business from a moral perspective is that business
organizations in principle, should help in the promotion of the common good
and in the protection of person’s rights and interest.

Business make the goods and services you used each day. That includes
the products and services used by other businesses as well as those needed by
individual consumers. There are generally three types of business
organizations operated by profit: service, merchandising, and manufacturing
businesses. Service business provide services rather than products to
consumers. Merchandising businesses sell products they purchase from other
businesses to customers. Manufacturing businesses change basic inputs into
products that are sold to customers.

Forms of Business Organization


1. Sole Proprietorship a business owned by one person.
Advantages of a sole proprietorship:
Total undivided authority
Low organizational cost and license fees
Tax savings
No restrictions on type of a business (if it is legal)
Disadvantages of a sole proprietorship
Unlimited liability
Limitations on size (resources/funds)
Limited by management’s ability to be jack of all trades
2. Partnership- an association of two or more people as
partners. It refers to an arrangement in which the
individual share the profit and liabilities to a business
venture. Its chief characteristics are: (a) association of
individuals; (b) mutual agency; (c) limited life; (d) unlimited
liability; and (e) co-ownership of property.
3. Corporation -an entity created by law that is separate and
distinct from its owners and its continued existence is
dependent upon the corporate statutes of the state in which
it is incorporated.
The characteristics that distinguish a corporation from
proprietorships and partnerships are:
a. The corporation has separate legal existence from its owners.
b. The stockholders have limited liability.
c. Transferable ownership rights (ownership is in stock).
d. Ability to obtain capital (relative ease).
e. The corporation can have a continuous life.
f. The corporation must pay an income tax on its earnings, and
the stockholders are required to pay taxes on the dividends
they receive: the result is double taxation of distributed
earnings.
g. The corporation is subject to numerous government
regulations.
h. An artificial/ juridical “person” endowed with ability for self-
management that is, the management structure is at the
discretion of the board of directors.

Key points
The first step in forming a corporation is to file an application
of incorporation with the government (in the Philippines), this is
done through the (SEC) Securities and Exchange Commission. After
the application of incorporation has been approved, the corporation
is granted a charter or articles of incorporation. The article of
incorporation formally creates the corporation. The corporate
management and board of directors then prepare a set of bylaws,
which are the rules and procedures for conducting the corporation’s
affairs. Cost may be incurred in organizing a corporation. These
costs include legal fees, taxes, state incorporation fees, promotional
costs.
Such costs are considered Organizational Expenses.
Comparison and Contrast Among Various Forms of Business
Organization
The owner of a sole proprietorship has complete control over
the company’s finances and operations. Sole proprietorship are not
required to consult anyone when it comes to making business
decisions. All partners of a partnership have input regarding how
the company’s resources are used and other important business
decisions. In partnership business, all partners are responsible for
making decisions that will impact the business. This may provide
multiple viewpoints, which could potentially lead to better business
decisions.

The sole proprietor can maintain complete control over all


aspects of the business. There are no shareholders to pacify and no
board of directors to appease. On the other hand, corporations have
an advantage when it comes to raising capital for the business – the
ability to raise funds through the sale of stock. In addition,
corporations file taxes separately from their owners. Owners of a
corporation only pat taxes on corporate profits paid to them in the
form of salaries, bonuses, and dividends, while any additional
profits are awarded a corporate tax rate, which is usually lower
than a personal income tax rate.

The Role of Each Form of Business Organization in the


Economy
Small business owned by sole proprietors are well- recognized
worldwide as vital and significant contributors to economic
development, job creation, and general health and welfare of
economies. Microbusiness form a dynamic, integral part of the
market economy, providing goods and services and a gateway by
which millions enter the economic and social mainstream of the
society.

On the other hand, the Industrial Revolution brought with its


new forms of machine production that enabled business to make
massive quantities of goods to ship and sell in national market.
Case Study
Abakada Company

Abakada Company began as a small enterprise buying and selling


various food products. After a few years of successful operations, it added
apparel and footwear to its inventory. During this initial stage, Abakada
manage to work based on its proprietor’s capital, borrowing from its bank from
time to time when needed.

After more years of operation, Abakada found that it needed to draw


larger amounts of funds through bank borrowing, as well as to hire more
personnel for the growing marketing needs and services, apart from
administrative function like accounting, among others. The proprietor carefully
weighed his options: “Shal I incorporate my business so that I can have greater
and easier access to funds, especially larger loans from the banks? If I hire
more people as my company goes bigger, will I be able to manage and control
well the personnel working for me? If I begin offering ownership shares to other
people outside my family, will serious disagreements arise among us in terms
of products and service to offer in the future as well as managerial style”

These and other questions occurred to the proprietor of Abakada


Company. He has approached you for advice.

Guide Questions: Based on the situation above, give the owner of Abakada
Company appropriate advice regarding whether incorporate his business. You
might wish to categorize the pros and cons into the following:
1. Business size issue
2. Issues related to mission and objectives
3. Procedures for incorporation
4. Personnel issues
5. Control issues
6. Funding sources issues
7. Legal and taxations issues

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