Forms of Business Organization, Advantages and Disadvantages, requirements for formation and applicable Philippine Laws

ORGANIZATION

Ownership and structural forms of business organization, applicable laws, requirements for their formations, and advantages and disadvantages

Type of Ownership

1. 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).

d)       Applicable Laws

Republic Act No. 9178 Barangay Micro Business Enterprises (BMBEs) Act of 2002

1. 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.

a)       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.

b)       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.

d)       Applicable Laws

Unlike corporations whose governing law is a special law - the Corporation Code of the Philippines, partnerships in the Philippines are governed by and covered under Articles 1767 to 1867 of the Civil Code of the Philippines [circa 1950].  These are the provisions of law which govern all aspects of partnerships - from their creation, formation, existence, operation and management to their dissolution and liquidation, including the obligations of the partners to one another, to the public or third persons and to the government.

1. 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.

a)       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.

b)       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 cooperative’s 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.

FIRST. Get organized. You must have at least 15 members to do that. At once determine the common problems you would want solved and the basic needs you would want provided for through a cooperative. You may want to include increasing your production, marketing your produce, credit assistance, power generation, banking or insurance and other similar needs. Determining your problems and needs will also help you classify the kind of cooperative you will be organizing. Even before a cooperative is set up, a dedicated core group people who will do all the organizational and paper works is a must. From this core group, working communities may be formed to set things moving. These committees may include membership, finance, executive, secretariat to name a few.

SECOND. Prepare a general statement called an economic survey. This statement will help you measure your cooperative’s chances of success.

THIRD. Draft the cooperative’s by-laws. The by-laws contain the rules and regulations governing the operation of the cooperative.

FOURTH. Draft the articles of cooperation. Mandatory contents of the articles of cooperation are the following: (a) the name of the cooperative, which must include the word “cooperative”; (b) the purpose or purposes and scope of business of the cooperative; (c) the term of existence of cooperative;(d) the area of operation and the postal addresses of the registrant-cooperators; (e) the common bond of membership; (f) the names of the directors who shall manage the cooperative; (g) the amount of share capital; (h) the names and residences of its contributors, and (i)the type of cooperative, whether it is primary, secondary or tertiary.

FIFTH. Secure bond for accountable officer(s). The officers normally accountable are the Treasurer and the Manager. The amount of the bond is to be decided upon by the Board of Directors, based on the initial net worth of the cooperative which includes the paid-up capital, membership fees and other assets of the cooperative at the time of registration.

SIXTH. Register your cooperative with the Cooperative Development Authority (CDA).

Submit the following required documents:

v  Four (4) copies each of the Economic Survey, Articles of Cooperation and By-Laws duly notarized;

v  Bonds of accountable officer(s) (any directors, officers and employees) handling funds, securities, of properties in behalf of the cooperative;

v  Sworn statement of the treasurer duly notarized showing that at least 25% of the authorized share capital has been subscribed, and at least 25% of the total subscription has been paid. The paid-up capital must not be less than Php 2,000.00.

Note: It must be noted that no member may own more than 20% of the subscribed share capital and each share must not be less than Php 1.00

d)       Applicable Laws

Presidential Decree 175 An Act Strengthening the Cooperative Movement

Republic Act 6938 The Cooperative Code of the Philippines (as amended)

1. 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.

a)       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.

b)       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.

d)       Applicable Laws

Batas Pambansa Blg. 68 The Corporation Code of the Philippines