Lesson 006 - Forms of Business Organizations

Summary

This educational video script covers the various forms of business organizations: sole proprietorship, partnership, corporation, and cooperatives. It defines each type, detailing their advantages and disadvantages. Sole proprietorships are easy to establish with full control but have limited capital and unlimited liability. Partnerships offer shared expertise but can have decision-making conflicts. Corporations provide limited liability and access to capital through shares but face double taxation and potential agency problems. Cooperatives focus on member needs but may lack active participation. The script is designed to help viewers understand and differentiate these business structures.

Takeaways

• 📚 The script discusses four main forms of business organizations: sole proprietorship, partnership, corporation, and cooperatives.
• 👤 Sole proprietorship is an unincorporated business owned by one person, characterized by ease of establishment, personal control, and unlimited liability.
• 🤝 Partnership is a business contract between two or more people who contribute to a common fund with the intention of dividing profits, offering shared expertise but also potential for disagreements.
• 🏢 Corporations are artificial legal entities with limited liability for shareholders, offering a large source of capital but subject to double taxation and potential agency problems.
• 🤗 Cooperatives are member-owned enterprises focused on common economic, social, and cultural goals, with democratic organization but challenges in attracting big investors.
• 🚀 Advantages of sole proprietorship include ease of formation, full control, and quick decision-making, but it has limited capital and high personal risk.
• 🔄 In partnerships, the advantages are shared expertise and resources, but there can be a loss of autonomy and emotional issues among partners.
• 💰 Corporations benefit from limited liability and easy transferability of ownership, but they may face higher costs for setup and double taxation on profits.
• 👥 Cooperatives have lower setup costs and democratic decision-making, but they can struggle with a lack of member participation and unattractive investment prospects for big investors.
• 📈 The script aims to help learners define, explain, and differentiate between the four business forms, as well as identify their advantages and disadvantages.
• 🌐 The lesson is theoretical, providing a foundational understanding of business organization structures that can be applied across various industries and scenarios.

Q & A

What are the two main types of users of accounting information discussed in the lesson?

The two main types of users of accounting information are internal users, which include owners and managers, and external users, which include investors, creditors, customers, employees, suppliers, tax authorities, government, and the general public.

What are the four forms of business organizations mentioned in the script?

The four forms of business organizations mentioned are sole proprietorship, partnership, corporation, and cooperatives.

What is a sole proprietorship and what are its main advantages?

A sole proprietorship is an unincorporated business owned by one person, often referred to as a sole trader. Its main advantages include ease of establishment and dismantling, full control by the owner, quick decision-making, and the ability to give a personal touch to the business.

What are some disadvantages of operating a sole proprietorship?

Some disadvantages of a sole proprietorship include limited size and capital, limited life due to the need for more funding, limited professional skills and talent, unlimited liability, and the potential for wrong decisions due to the lack of diverse perspectives.

What is a partnership and how does it differ from a sole proprietorship?

A partnership is a contract entered by two or more people who agree to contribute money, property, or industry to a common fund with the intention of dividing profits. It differs from a sole proprietorship in that it involves multiple owners and can offer a broader range of expertise, shared funding, and more business opportunities.

What are the potential disadvantages of a partnership business model?

Disadvantages of a partnership include loss of autonomy due to the need for agreement among partners, potential emotional issues within the partnership, future selling complications, and unlimited liability where partners' personal assets may be used to pay for the partnership's liabilities.

What is the definition of a corporation according to the revised corporation code in the Philippines?

A corporation is defined as an artificial being created by operation of law, having the right of succession, and possessing powers, attributes, and properties expressly authorized by law or incidental to its existence.

What are the main advantages of operating a corporation?

The main advantages of a corporation include limited liability for shareholders, a large source of capital through share sales, easy transferability of ownership, and the potential for independent management.

What are the potential disadvantages of a corporation?

Disadvantages of a corporation include double taxation on profits and distributions to shareholders, the potential for agency problems where management decisions differ from owner interests, higher costs due to government requirements, and the complexity of forming a corporation.

What is a cooperative and how does it differ from other business forms?

A cooperative is a people-centered enterprise owned, controlled, and run by its members to realize their common economic, social, and cultural needs and aspirations. It differs from other business forms in that it is democratic, with one member one vote, and focuses on the common goal of its members rather than individual profit.

What are some advantages and disadvantages of a cooperative business model?

Advantages of a cooperative include lower creation costs, broader marketing reach due to many members, and democratic organization. Disadvantages include less attractiveness to big investors due to the one member one vote rule, and a potential lack of membership and participation.

Outlines

00:00

📚 Introduction to Business Organization Forms

This paragraph introduces the topic of different forms of business organizations, focusing on the distinction between internal and external users of accounting information. It sets the stage for a discussion on sole proprietorship, partnership, corporation, and cooperatives, outlining the lesson's goal to define, explain, and differentiate these forms, as well as to identify their advantages and disadvantages.

05:00

👤 Sole Proprietorship: The Basics and Characteristics

The paragraph delves into the concept of a sole proprietorship, an unincorporated business owned by a single individual. It highlights the ease of establishment and dismantling, the full control the owner has, and the personal touch that can be added to the business. Advantages include ease of formation, direct reward for effort, and quick decision-making. Disadvantages cover limited size, limited life, lack of diverse professional skills, unlimited liability, limited capital, and potential for poor decision-making.

10:02

🤝 Partnership: Sharing Resources and Profits

This section explains the nature of partnerships as defined by the Civil Code of the Philippines, emphasizing the contractual agreement between two or more persons to contribute to a common fund with the intention of sharing profits. It discusses the advantages of partnerships, such as bridging expertise, accessing more cash and property, increased business opportunities, and gaining new perspectives. Disadvantages include loss of autonomy, emotional issues, selling complications, and unlimited liability for personal assets.

15:04

🏢 Corporation: An Artificial Entity with Defined Rights

The paragraph describes a corporation as an artificial being with legal rights and attributes, including limited liability and the ability to raise capital through share sales. It outlines the benefits of limited liability, large capital sources, and transferable ownership. However, it also points out the downsides, such as double taxation, potential agency problems with management, and higher costs due to government requirements.

👥 Cooperatives: Member-Centered Enterprises

The final paragraph discusses cooperatives as people-centered enterprises owned and run by their members to meet common economic, social, and cultural needs. It outlines the advantages of lower creation costs, wider marketing reach, and democratic organization within cooperatives. However, it also notes the disadvantages, including lack of attraction for big investors, due to the one-member-one-vote principle, and a general lack of membership participation.

Keywords

💡Accounting Information

Accounting information refers to the financial data and reports generated by businesses that are used for decision-making by various stakeholders. In the video, it is mentioned that there are two primary users of accounting information: internal users like owners and managers, and external users such as investors, creditors, and the general public. This concept is foundational to understanding the different forms of business organizations and their financial reporting needs.

💡Internal Users

Internal users are individuals within an organization who use accounting information for operational and strategic decision-making. The script specifies that owners and managers fall into this category. They rely on accounting data to assess the performance of the business and to plan for future operations, which is crucial for the efficient management of the organization.

💡External Users

External users are individuals or entities outside the organization that require accounting information for their own purposes. The video lists investors, creditors, customers, employees, suppliers, tax authorities, government, and the general public as external users. Their reliance on this information underscores its importance in building trust and transparency in business operations.

💡Sole Proprietorship

A sole proprietorship is an unincorporated business owned and run by one individual. The video describes it as the simplest form of business, where the owner has full control and bears unlimited liability. It is easy to establish and dismantle, making it popular among small business owners. The script uses the example of a person starting a milk tea shop to illustrate the concept.

💡Partnership

A partnership is a business arrangement where two or more individuals agree to contribute money, property, or industry to a common fund with the intention of sharing profits. The video explains that partnerships can be formed for various purposes, including the exercise of a profession, as exemplified by accounting and law firms. Partnerships offer advantages such as shared expertise and increased capital but also come with challenges like potential disagreements among partners.

💡Corporation

A corporation, as defined in the video, is an artificial legal entity created by law, with rights of succession and the ability to own property and conduct business. It is characterized by limited liability for shareholders, the ability to raise capital through share sales, and a separation between ownership and management. The video mentions the concept of double taxation and the potential for agency problems as part of the corporate structure.

💡Cooperative

A cooperative is a people-centered enterprise owned, controlled, and run by its members to meet their common economic, social, and cultural needs and aspirations. The video highlights that cooperatives are formed around a shared goal and operate on a one-member, one-vote principle. They offer benefits like lower creation costs and democratic organization but may face challenges such as lack of member participation.

💡Limited Liability

Limited liability is a key feature of corporations and some partnerships, where the personal assets of the owners are protected from the debts and liabilities of the business. The video explains that in a corporation, shareholders are not personally liable for the company's debts, which is a significant advantage that encourages investment and reduces risk.

💡Double Taxation

Double taxation refers to the levying of taxes on the profits of a corporation and again on the distributed profits when they are received by the shareholders. The video points out that this is a disadvantage of corporations, as it can reduce the overall returns for investors and create a financial disincentive for certain business activities.

💡Agency Problem

An agency problem arises when there is a conflict of interest between the managers of a corporation (the agents) and the shareholders (the principals). The video mentions that the separation between ownership and management in a corporation can lead to decisions by managers that may not align with the best interests of the shareholders, which is a potential disadvantage of the corporate structure.

💡Business Organization Forms

The video discusses four primary forms of business organizations: sole proprietorship, partnership, corporation, and cooperative. Each form has its unique characteristics, advantages, and disadvantages, which are crucial for understanding the legal, financial, and operational aspects of running a business. The script provides a comparative analysis of these forms, aiding viewers in making informed decisions about business structure.

Highlights

Introduction to the lesson on different forms of business organizations.

Definition and explanation of internal and external users of accounting information.

Overview of the four main business organization forms: sole proprietorship, partnership, corporation, and cooperatives.

Description of a sole proprietorship as an unincorporated business with a single owner.

Advantages of a sole proprietorship, including ease of establishment and full control by the owner.

Disadvantages of a sole proprietorship, such as limited size and unlimited liability.

Definition of a partnership as a contract between two or more people to contribute to a common fund.

Advantages of partnerships, like bridging gaps in expertise and providing more funding opportunities.

Disadvantages of partnerships, including loss of autonomy and potential emotional issues among partners.

Explanation of a corporation as an artificial being created by law with rights of succession.

Advantages of corporations, such as limited liability and a large source of capital through share sales.

Disadvantages of corporations, including double taxation and potential agency problems.

Definition of cooperatives as people-centered enterprises owned and run by their members for common goals.

Advantages of cooperatives, such as lower creation costs and democratic organization.

Disadvantages of cooperatives, including lack of attractiveness to big investors and low member participation.

Conclusion summarizing the four business organization forms and their characteristics.

Announcement of the next lesson's focus on the activities of business organizations.

Transcripts

[Music]

hello everybody so in the last lesson we

discussed the different users of account

information and we have two users of

accounting information we have the

internal users of accounting information

and we also have external users of

accounting information so last lesson we

knew that internal users involves owners

and managers and external users of

accounting information includes

investors creditors customers employees

suppliers tax authorities government and

the general public so welcome to lesson

6 and we will be talking about the

different forms of business

organizations so at the end of the video

you should be able to define explain and

differentiate the four forms of business

organizations and identify the

advantages and disadvantages of each

form of business organizations allow me

more than a indiv of Avitus a video can

say we will be discussing a pure

theoretical lesson so given that Wonga

Paquita okay so I think we're ready to

start

so the different forms of business

organization is presented to you so we

have sole proprietorship partnership

corporation and cooperatives so those

are the four forms of business

organizations that we will be talking

about today so let's first talk about

the sole proprietorship type of business

a sole proprietorship also referred to

as a sole trader or a proprietorship is

an unincorporated business that has just

one owner okay

so in its simplest form a sole

proprietorship type of business is only

owned by one person

ISA l'homme RA na easy pan yonder Magda

unum sorry

no business and then that's it multiple

user none business and he is the only

owner of the business

okay so sole proprietorships are easy to

establish in this mantle when you say

this mantle I can establish I at

i/o so punking bug minimum a bug huh

better Pawnee could close muna young

business that's what you call this

mantle or dismantling of the business

sole proprietorships are easy to

establish and dismantle due to a lack of

government involvement making them

popular with small business owners and

contractors it's just like this when a

person has the capital to start a

business and I and he thinks that he is

ready to enter into a business then he

can put up his own business and become a

sole proprietor okay so let me discuss

with you the advantages and

disadvantages are we having a sole

proprietorship type of business or being

the only boss in the business okay so

for the advantages first is it's easy to

form like what I've told you earlier

when a sole proprietor or a potential

owner of a business things that he is

ready to enter into a business or he

already has the necessary capital in

order for him to open the business then

he can open the business easily okay

effort reward your relationship is when

the efforts of a sole proprietor is

given to the business he will receive

and enjoy the reward for that effort

that he gave okay so F fourtner Perry on

rewards non chambray the Shillong you

may add in business he will really enjoy

the rewards of what he did okay and then

he has a full control he since he is the

only boss and he is the owner of that so

proprietorship type of business then he

has full control of the whole entity and

then the sessions are also quick because

since the owner is the sole owner of the

business he doesn't need anyone to

advise him of what to do so the

decisions will

be quick and then operations are also

economical inefficient it's it's just

like because the things are easy and

your business is a bit small actually

then your operations are efficient but

not necessarily effective so we need to

check on that but basically when it's

efficient you manage your resources

accordingly and now you're you are

actually able to do it well and then

personal touch because you are the sole

owner of your business you can give a

personal touch to what your what you

really want to do okay so let's say for

example you put up a milk tea shop in

your sole proprietorship because of the

personal touch power that you have you

can do any theme that you have in your

milk tea shop and then keep the business

simple dynamic and flexible because the

owner will be able to enjoy the personal

touch and full control of the business

the business itself is dynamic and

flexible however we have the following

disadvantages number one its small in

size usually sole proprietorships don't

really go that big because they're the

they have limited capital limited life

in a sense that sole proprietorships

tend to stop as a sole proprietor

because they need more funding they

enter into partnerships our corporation

so as a sole proprietor it stops so that

that's what we mean by a limited life

and then lapse professional skills and

talent because you don't have any

partners with you or any managers with

you and being the sole owner of the

business we are the only brain working

in the business so you lack the

professional skills and talents that

might be available into other forms of

this's organization

one thing of a disadvantage also in sole

proprietorship type of business is the

liability is unlimited in any case the

makanda automaton young business more

NACO but the personal assets more haha

boolean nama creditors

wrote prospects we have actually a

problem with a growth of a business and

it's all proprietorship type of business

and then that's what I've told you

earlier capital is very limited in this

type of business and you might be at

risk of doing wrong decisions okay so

that is a sole proprietorship type of

business now let's make it a bit bigger

let's go to the partnership type of

business so according to article one

seven six seven of the Civil Code of the

Philippines by the contract of

partnership two or more persons bind

themselves to contribute money property

or industry to a common fund with the

intention of dividing the profits among

themselves and two or more persons may

also form a partnership for the exercise

of a profession so let's look at the

definition so that we can understand

partnership very well first of all a

partnership is a contract that is

entered by two or more people remember

that because if there's no contract

there's no partnership okay

and then they bind themselves to

contribute money property or industry

what will they contribute they can

contribute money to start the business

operating that's the starting capital or

the partners can contribute property so

if you cannot contribute money then

maybe you can contribute the office

space or the selling space of the

company or maybe you don't have the

money or you don't have any property to

contribute but you have the skills or

the talents industry let's say for

example that local Makaha begun you want

to put up a bakery

one of you is ma para a deep reading

show you will contribute non money one

of you has already an available selling

space

he can contribute the property for that

specific partnership now one of your

friends doesn't have really that money

our property to contribute in the

business but he is good in baking so he

can contribute the industry that he has

now that money property our industry

will be distributed into a common fund

and the common fund is the partnership

itself the business itself and the

intention of the partners in entering

through the partnership divide the

profits among themselves and always

remember that two or more persons can

also form a partnership then in a way

that they can exercise their profession

the best example is our profession

accounting firms accounting firms is not

if not sole proprietors they are

partnerships

Navaro ampere in company East lolly

Paulo in company CCF Gura's vallejo in

company as you can see those are

surnames of different CPAs who has

partnered together in order to form a

partnership business of exercising a

profession another example are law firms

lawyers who create their own partnership

business and exercise and give surveys

of legal services so that's a

partnership now let me discuss with you

also the advantages and disadvantages of

a partnership business a partnership

bridges the gap in expertise and

knowledge if you're not really

knowledgeable with this then maybe your

partner is knowledgeable with that kind

of thing like my example canina

you might be having the money or you

contributed the property but you don't

have the skill of baking your bakery

will not pursue but because you have a

partner who is good and baking then the

bakery can continue more cash and

property so unlike a sole proprietor

which is limited in funding in

partnership you have more funding

opportunities because you can partner

with people and then more business

opportunities you are all

representatives of the business itself

and you can advertise your business to

others which gives more business

opportunities because the number of

partners you have is the number of

chances that you can explore outside not

to mention you have moral support of

your friends in the partnership and then

it gives a new perspective of things

maybe partner a has a decision which

partner B has a new perspective of

things they can guide each other and

make better decisions with each other

however the disadvantages of a

partnership type of business s there is

a loss of autonomy so unlike in sole

proprietorship type of business where

there is really autonomy with the owner

there is lots of autonomy so basically

the decision of partner a might not be

agreed by partner B and so on there

might also be some emotional issues that

you need to consider in a partnership

most especially with your relationships

with your partners and then future

selling complications like partner a the

say wants to enter into this contract

then partner B does not K and then

unlimited liability actually

partnerships can become limited

liability but the general point here is

that like sole proprietorships the

partners can also can also use their

personal assets to pay for the

liabilities of the partnership in any

case makanda automaton didn't sell as a

duo so that is in partnership type of

business let's move on to the

corporation type of business according

to the revised corporation code in the

Philippines a corporation is an

artificial being created by operation of

law having the right of succession in

the powers attributes and properties

Express the authorized by law or

incidental to X existence so again the

definition of a corporation might be 2d

for you so let's

have it one by one remember that the

corporation is an artificial da but

technology our being there are also a

being if people like us are natural

beings a corporation is an artificial

being in short pardon Santa every

civilian da hell Tasha kahit artificial

Pradesh on kazoo Han a spread the

Kareena Kapoor had casa para sham oh

okay it works like a person but it's not

a natural person okay remember also that

it is created by operation of law

so without the approval of it any legal

perspective here then the corporation

will not proceed

a corporation has the right of

succession so in any case that the

owners would change the corporation is

to continue there is a succession and

then the powers attributes and

properties are expressly authorized by

law or incidental to its existence let

me show you the different advantages and

disadvantages of a corporation one

advantage of a corporation is it enjoys

limited liability

you cannot go after the personal assets

of the shareholders to answer the

liabilities of the corporation there is

really a gap between the owners and the

corporation itself and then you have a

big source of capital once you sell

shares you get money but the downside of

it is that you have owners that you

might not know because of that shares

and then the ownership transfers if I do

not want to become a shareholder anymore

I can sell my shares to others I can

transfer it because that's my shares I

can just sell it ok we can easily do

that in a corporation however a

corporation has double taxation double

taxation in a sin

that the profits of a corporation is

being taxed already

however when those profits are already

distributed to the shareholders of a

corporation it will also be taxed and

that's what you've all the final tax so

there is double taxation and profit it

was already taxed the time it was

enjoyed by the corporation and the time

it's distributed to the shareholders

it's also taxed and then we also have

independent management remember that the

owners of a corporation will create a

management that will really look unto

the operations of a company and

sometimes the decisions of those

management people is different from the

decisions of the owners and that's what

that's what we call an agency problem

why the management is the agent that

works for the principal and the

principal people of the business are the

owners of the corporation and then

lastly form a corporation costs more

because you will be dealing with many

government requirements in order for you

to set up a corporation and lastly we

have cooperatives cooperatives are

people centered enterprises owned

controlled and run by and for their

members to realize their common economic

social and cultural needs and

aspirations

remember that cooperatives are being

built because there is only a common

goal for example a credit cooperative

may benefit their members and then as

part of their funding they can create a

mini store and the proceeds of the store

can be enjoyed by the members of the

co-operative either by loan

by having it okay it's like that the

members of a cooperatives are enjoying

the benefits of the cooperatives only

because of the common goal that they

have okay so let me show you also the

advantages and disadvantages of a

cooperative creation of a cooperative

has lower cost and then you can also

have further marketing reach for that

because you have many members of the

co-operative you can work for you and

then it is a democratic organization

because the goal of a cooperative is let

the members of that co-operative enjoy

the benefits of the co-operative however

big investors do not get much attractive

with the co-operative because in a

cooperative one member one vote only

unlike any corporation that the number

of votes that you can give in a

shareholders meeting is equal to the

number of shares that you bought in the

corporation so usually big investors

don't really like investing in a

cooperative because it's only one is to

one and lastly there is a lack of

membership and participation so

basically people are not attracted in

entering a cooperative and there is also

a lack of participation even though they

are a member so sometimes those things

have been in a cooperative okay so those

are the four forms of business

organization so when only one person

owns the business it's a sole

proprietorship type of business but when

a group of people already pulls their

own money property or industry with the

intention of dividing profits among

themselves that is a partnership but

when the ownership is already divided

into shares of stock then that is a

corporation but when the members of the

firm only has a one economic or cultural

goal then that is a cooperative thank

you very much for listening and our next

lesson would be the activities of the

business organizations which includes

service industries merchandising

industries and manufacturing industries

thank you and have a great day

[Music]