The Nature and Forms of Commercial Organization

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CHAPTER 5
The Nature and forms of Commercial Organizations

Commercial organizations may be classified into three (3) general classifications: 1. Private individual ownership
2. Public or government ownership
3. Mixed or both government and private ownership

1. Private Individuals Ownership

Any form of business ownership may be organized and would have certain advantages and disadvantages which the business organizer must have to evaluate. According to Martinez, Abasolo, and Carlos, the following are the questions to be considered in deciding the form of business: 1. Is it simple or difficult to form?

2. Is capital easy to rise?
3. What are the risks and the liabilities of the owners?
4. Who holds the authority and responsibility for the management and administration of the business? 5. What stability does the form offer?
6. Is it flexible?
7. What the legal status of this form is as applied to the particular business in mind? 8. What is the extent of government control?
9. What is the tax advantage of this form of organization? 10. Is the business environment favorable?

Private commercial organizations or business enterprises may take the following forms of ownership:

* Individual or Sole Proprietorship

It is a business owned by one person. This form of ownership is small, requires but little amount of capital, and is readily established under the control of one person. It refers to an individual who owns, manages, assumes all the risks, and derives all the products or profits from a business.

Advantages of Sole Proprietorship

* Easiest to establish.
* Easiest to terminate.
* Small amount of capital is required in starting a business. * Presence of personal element in managing the business.
* Freedom and immediate action and control in operating the business. * Ownership of all profits.
* Tax savings.
* Minimum legal requirements.
* High credit standing.
* Business secrecy.

Disadvantages of Sole Proprietorship

* Limited amount of capital.
* Lack of continuity.
* Limited judgment and wisdom.
* Unlimited liability.
* Difficulty of management.
* Limitation in business size.
* Limited opportunities of employees for promotion.
* Difficulties in managing the day-to-day business operations.

Creating a Sole Proprietorship

No special legal procedures, permits, or licenses are required. A sole proprietorship is not limited in size by either the amount of inputs which can be used or the amount of products produced. The business can be any number of employees, additional management may be hired, and property may even be co-owned with others.

Income Taxes

The owner of this business pays income taxes on any business profit at the tax rates in effect for individual or joint returns. Business profits and capital gains are added to other taxable income earned to determine the individual total taxable income.

* Partnership

A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited person liability of the debts incurred by the partnership. It is a voluntary association of two (2) or more persons to carry on, as co-owners of a business for profit.

Basic Characteristics of Partnership

1. Profit and Loss: The sharing of the business profit and loss.
2. Property y or Assets: Shared control of property.
3. Management: Shared management of the business.

General legal agreement of partners:

1. Each person involved participates in management decisions. 2. Assets are owned jointly.
3. Sharing of profits and loss.
4. The parties (business) operate under one name.
5. The parties have joint bank account for doing business transactions. 6. The parties keep a single set of business...
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