Learning Activity Sheet

Empowerment Technology
2nd Semester Quarter 3, Week 1

MELC: Differentiate the forms of business organizations in terms of their purpose and roles in
socio-economic development. (ABM_ESR12-IIIa-d-1.1; ABM_ESR12-IIIa-d-1.2;
ABM_ESR12-IIIa-d-1.3)

FORMS OF BUSINESS ORGANIZATIONS: PURPOSE AND ROLE IN SOCIO-

ECONOMIC DEVELOPMENT

A business entity is an organization that uses economic resources to provide goods or services to
customers in exchange for money or other goods and services.

Three Major Types of Businesses:

1. Service Business
A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.
Examples of service businesses are: salons, repair shops, schools, banks, accounting firms,
and law firms.
2. Merchandising Business
This type of business buys products at wholesale price and sells the same at retail price. They
are known as "buy and sell" businesses. They make profit by selling the products at prices
higher than their purchase costs.
A merchandising business sells a product without changing its form. Examples are: grocery
stores, convenience stores, distributors, and other resellers.
3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the intention
of using them as materials in making a new product. Thus, there is a transformation of the
products purchased.
A manufacturing business combines raw materials, labor, and overhead costs in its
production process. The manufactured goods will then be sold to customers.
4. Hybrid Business
Hybrid businesses are companies that may be classified in more than one type of business. A
restaurant, for example, combines ingredients in making a fine meal (manufacturing), sells a
cold bottle of wine (merchandising), and fills customer orders (service).

Basic Forms of Business Organization:

1. Sole Proprietorship
A sole proprietorship is a business owned by only one person. It is easy to set-up and is the
least costly among all forms of ownership. The owner faces unlimited liability; meaning, the
creditors of the business may go after the personal assets of the owner if the business cannot
pay them. It is usually adopted by small business entities.
The sole proprietorship is the simplest form of business organization and is the easiest to
register through the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the
Department of Trade and Industry (DTI).
Characteristics of Sole Proprietorship
a) Single Ownership: the business has a single owner who himself/herself starts the business by
bringing together all the resources.
b) Less Legal Formalities: The formation and operation of a sole proprietorship form of
business organization does not involve any legal formalities. Thus, its
formation is quite easy and simple.
c) No Separate Entity: The business unit does not have an entity separate from the owner. The
businessman and the business enterprise are one and the same, and the
businessman is responsible for everything that happens in his business unit
d) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same
time, the entire loss is also borne by him. No other person is there to share
the profits and losses of the business. He alone bears the risks and reaps
the profits.
e) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his
business assets are not enough to pay the business liabilities, his personal
property can also be utilized to pay off the liabilities of the business.

2. Partnership
A partnership is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves.
In general partnerships, all partners have unlimited liability. In limited partnerships, creditors
cannot go after the personal assets of the limited partners. Joint venture is undertaken by two
or more companies in pursuit of a mutually profitable goal.
A Partnership is registered with the Securities and Exchange Commission (SEC). The most
common partnerships are professional partnerships such as law firms and accounting firms.

Characteristics of partnership form of business organization

a) Two or More Persons: To form a partnership firm at least two persons are required. The
maximum limit on the number of persons is ten for banking business and
20 for other businesses.
b) Contractual Relationship: Partnership is created by an agreement among the persons who
have agreed to join hands. Such persons must be competent to contract.
Thus, minors, lunatics and insolvent persons are not eligible to become
the partners. However, a minor can be admitted to the benefits of
partnership firm i.e., he can have share in the profits without any
obligation for losses.
c) Sharing Profits and Business: There must be an agreement among the partners to share the
profits and losses of the business of the partnership firm.

d) Existence of Lawful Business: The business of which the persons have agreed to share the
profit must be lawful.
e) Principal Agent Relationship: There must be an agency relationship between the partners.
Every partner is the principal as well as the agent of the firm. When a
partner deals with other parties he/she acts as an agent of other partners,
and at the same time the other partners become the principal.
f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as well
as individually liable for the debts and obligations of the firms. If the
assets of the firm are insufficient to meet the firm’s liabilities, the
personal properties of the partners can also be utilized for this purpose.
However, the liability of a minor partner is limited to the extent of his
share in the profits.
g) Voluntary Registration: The registration of partnership firm is not compulsory. But an
unregistered firm suffers from some limitations which makes it virtually
compulsory to be registered. Following are the limitations of an
unregistered firm.

(i) The firm cannot sue outsiders, although the outsiders can sue it.
(ii) In case of any dispute among the partners, it is not possible to settle the dispute through court
of law.
(iii) The firm cannot claim adjustments for amount payable to, or receivable from, any other
parties

3. Corporation
In a corporation, 5 to 15 persons, who are called incorporators, hold at least one share and are
bound by the articles of incorporation filed with the SEC. The paid up capital (total amount of
capital received by a company from its shareholders in exchange for shares of stocks) of a
Philippine corporation must not be less than ₱5,000.
A corporation can be stock or nonstock. A stock corporation has a capital stock divided into
shares and is authorized to distribute to the shareholder’s dividends or allotments of the
surplus profits on the basis of the shares held. A nonstock corporation is one where no part of
its income is distributable as dividends to its members, trustees, or officers. Any profit that a
nonstock corporation earns is used to further promote the purpose of the organization.
Nonstock corporations may be formed for charity, religious, educational, professional, or
other similar purposes.
A corporation has a separate legal personality from its owners. Ownership in a stock
corporation is represented by shares of stock. The owners (stockholders) enjoy limited
liability but have limited involvement in the company's operations. The board of directors, an
elected group from the stockholders, controls the activities of the corporation.

Characteristics of a Corporation
a) Unlimited life: As a corporation is owned by stockholders and managed by employees, the
sale of stock, death of a stockholder, or inability of an employee to function
does not impact the continuous life of the corporation. Its charter may limit
the corporation's life although the corporation may continue if the charter is
extended.
b) Limited liability: The liability of stockholders is limited to the amount each has invested in
the corporation. Personal assets of stockholders are not available to creditors
or lenders seeking payment of amounts owed by the corporation. Creditors are
limited to corporate assets for satisfaction of their claims.
c) Separate legal entity: The corporation is considered a separate legal entity, conducting
business in its own name. Therefore, corporations may own property, enter
into binding contracts, borrow money, sue and be sued, and pay taxes.

d) Relative ease of transferring ownership rights: A person who buys stock in a corporation is
called a stockholder and receives a stock certificate indicating the number of
shares of the company she/he has purchased. Particularly in a public company,
the stock can be easily transferred in part or total at the discretion of the
stockholder. Privately held companies may have some restrictions on the
transfer of stock.
e) Professional management: Investors in a corporation need not actively manage the business,
as most corporations hire professional managers to operate the business. The
investors vote on the Board of Directors who are responsible for hiring
management.
f) Ease of capital acquisition: A corporation can obtain capital by selling stock or bonds. This
gives a corporation a larger pool of resources because it is not limited to the
resources of a small number of individuals. The limited liability and ease of
transferring ownership rights makes it easier for a corporation to acquire
capital by selling stock, and the size of the corporation allows it to issue bonds
based on its name.
g) Government regulations: The sale of stock results in government regulation to protect
stockholders. State laws usually include the requirements for issuing stock and
distributions to stockholders. The federal securities laws also govern the sale
of stock. Publicly held companies with stock traded on exchanges are required
to file their financial statements and additional informative disclosures with
the Securities and Exchange Commission. Certain industries, such as banks,
financial institutions, and gaming, are also subject to regulations from other
governmental agencies.
In addition to those basic forms of business ownership, these are some other
types of organizations that are common today:

Limited Liability Company

Limited liability companies (LLCs) in the USA, are hybrid forms of business that have
characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is
not considered a corporation. But, the owners enjoy limited liability like in a corporation. An
LLC may elect to be taxed as a sole proprietorship, a partnership, or a corporation.

Cooperative
A cooperative is a business organization owned by a group of individuals and is operated for
their mutual benefit. The persons making up the group are called members. Cooperatives may be
incorporated or unincorporated.
Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative
banking, credit unions, and housing cooperatives.

The Roles of Business in Socio-Economic Development

The primary objective of business organization is to develop, produce, and distribute goods and
services to the market in order to generate profits. But business organizations are not only meant
to generate profits for themselves. They perform important roles in the society, particularly in
socioeconomic development. Among these roles are providing goods and services, creating
employment opportunities, advancing the economy, promoting sustainability, and investing in
innovation and excellence. (Baquilas 2017)

Providing goods and services for the consumer.

Firms which produce a range of goods and services enable greater specialization in the economy.
In a very basic economy, there were no consumers as individuals devoted their time to growing
and catching their own food. Through firms offering the ability to sell food, it enabled some
workers to leave the land, and work in manufacturing non-food items. In recent years, many
successful firms have concentrated on developing time-saving products, which enables people
more free-time to work. For example, labor saving devices such as washing machines, vacuum
cleaners, and childcare have saved time for ‘household chores’ enabling women to enter the
labor force in greater number.

Firms employ different factors of production.

This includes employing workers (labor) to produce goods and services. By employing labor,
firms pay wages creating a flow of income to households, which ultimately can be spent by
households on goods produced by different firms.

Developing new products.

In the pursuit of profit, firms will try to respond to consumer preferences and develop new goods
and services. For example, in response to increased demand for coffee, firms have opened new
stores to cater for the new demand. In addition, firms may try to anticipate what consumers
would like be developing new products they hadn’t assumed were possible. For example, Apple
developing the iPod and iPhone (rather than trying to improve the old CD player) It can also
involve offering new services such as home delivery by supermarkets.

Investing in capital and new technology.

Firms will seek to make the most profitable use of capital and labor. This will involve
developing new technology and working practices to improve productivity in the economy.
Through seeking to cut costs, and invest in new capital, it contributes to higher productivity and
ultimately higher living standards. Without the process of innovation and investment, economies
would be more stagnant with slower living standards.
Activity 1: Crossword Puzzle
Complete the crossword puzzle correctly using the significant terms or concepts related to your
prior reading. The clues are located beside the puzzle.

Activity 2: Fill Me Up
Fill-out the blank by giving the items needed in each column. You will be given 1 point in each
correct answer.
Activity 3: Multiple Choice
Choose the letter of the best answer on the questions below.
_____1. Which of the following is a type of business that purchases products from other
businesses and sells them to customers at a higher retail price?
A. Service C. Manufacturing
B. Merchandising D. Hybrid

_____2. Law firms, medical practices and auto repair shops are examples of _______ type of
business.
A. Service C. Manufacturing
B. Merchandising D. Hybrid

_____3. When comparing the forms of business organization, which type protects owners the
most from personal financial liability?
A. Corporation C. Cooperative
B. Partnership D. Sole proprietorship

_____4. What is an advantage of organizing the business as partnership rather than a

corporation?
A. Partnerships have limited legal liability.
B. Partnership can issue stock to raise money.
C. Partnership needs a legal charter to begin.
D. Partnership can be started quickly.
_____5. A corporation is a legal “person”. This means the corporation ______.
A. is difficult to organize
B. can raise only limited capital
C. is the most common form of business
D. can sue or be sued, enter into contracts, and must pay taxes