SOLE PROPRIERTORSHIP 'Sole' means single and 'proprietorship' means ownership.

It means only one person or an individual becomes the owner of the business. Thus, the business organization in which a single person owns, manages and controls all the activities of the business is known as sole proprietorship form of business organization. The individual who owns and runs the sole proprietorship business is called a sole proprietor or sole trader. A sole proprietor pools and organizes the resources in a systematic way and controls the activities with the sole objective of earning profit. This form of business is the oldest and most common form of business organization.

Characteristics of Sole Proprietorship Sole proprietorship form of business organizations have the following characteristics. Single Ownership

 No sharing of Profit and Loss One-mans Capital One-man Control Unlimited Liability Less legal formalities Single Ownership A single individual always owns sole proprietorship form of business organization. That individual owns all assets and properties of the business. Consequently, he alone bears all the risk of the business. Thus, the business of the sole proprietor comes to an end at the will of the owner or upon his death. No sharing of Profit and Loss The entire profit arising out of sole proprietorship business goes to the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. Nobody else shares the profit and loss of the business with the sole proprietor. One mans Capital

 The capital required by a sole proprietorship form of business organization is totally arranged by the sole proprietor. He provides it either from his personal resources or by borrowing from friends, relatives, banks or other financial institutions. One-man Control The controlling power in a sole proprietorship business always remains with the owner. The owner or proprietor alone takes all the decisions to run the business. Of course, he is free to consult any body as per his liking. Unlimited Liability The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities. Less Legal Formalities The formation and operation of a sole proprietorship form of business organization requires almost no legal formalities. It also does not require to be registered. However, for the purpose of the business and depending on the nature of the business, the sole proprietorship has to have a seal.

He may be required to obtain a license from the local administration or from the health department of the government, whenever necessary. Advantages of Sole Proprietorship The sole proprietorship form of business is the most simple and common in our country. It has the following advantages: Easy to Form and Wind up: A sole proprietorship form of business is very easy to form. With a very small amount of capital you can start the business. There is no need to comply with any legal formalities except for those businesses which required license from local authorities or health department of government. Just like formation it is also very easy to wind up the business. It is your sole discretion to form or wind up the business at any time. Direct Motivation: The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between effort and reward. If he works hard, then there is a possibility of getting more profit and of course, he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard.

 Quick Decision and Prompt Action: In a sole proprietorship business the sole proprietor alone is responsible for all decisions. Of course, he can consult others. But he is free to take any decision on his own. Since no one else is involved in decision making it becomes quick and prompt action can be taken on the basis of this decision. Better Control: In sole proprietorship business the proprietor has full control over each and every activity of the business. He is the planner as well as the organiser, who co-ordinates every activity in an efficient manner. Since the proprietor has all authority with him, it is possible to exercise better control over business. Maintenance of Business Secrets: Business secrecy is an important factor for every business. It refers to keeping the future plans, technical competencies, business strategies, etc,. secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands. There is no need to disclose any information to others. Close Personal Relation: The sole proprietor is always in a position to maintain good personal contact with the customers and employees. Direct contact enables the sole proprietor to know the individual likes, dislikes

and tastes of the customers. Also, it helps in maintaining close and friendly relations with the employees and thus, business runs smoothly. Flexibility in Operation: The sole proprietor is free to change the nature and scope of business operations as and when required as per his decision. A sole proprietor can expand or curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have been selling books for school students. If you want to expand your business you can decide to sell stationery items like pen, pencil, register, etc. If you are running an STD booth, you can expand your business by installing a fax machine in your booth. Encourages Self-employment: Sole proprietorship form of business organisation leads to creation of employment opportunities for people. Not only is the owner self-employed, sometimes he also creates job opportunities for others. You must have observed in different shops that there are a number of employees assisting the owner in selling goods to the customers. Thus, it helps in reducing poverty and unemployment in the country. Limited Capital: In sole proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owners own funds as

well as borrowed funds sometimes become insufficient to meet the requirement of the business for its growth and expansion. Unlimited Liability: In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities. Lack of Continuity: The existence of sole proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is therefore uncertain. Limited Size: In sole proprietorship form of business organization there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit. Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be poor in marketing. Again, because of limited

financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management. Suitability of Sole Proprietorship Sole proprietorship form of business organisation is suitable: Where the market for the product is small and local. For example, selling grocery items, books, stationery, vegetables, etc. Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc. Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc. Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc. Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stall, etc. Where manual skill is required. For example, making jeweler, haircutting or tailoring, cycle or motorcycle repair shop, etc.

Formation of Sole Proprietorships Sole proprietorships are formed simply by beginning business. Unlike many other business organizations, no formal documents must be filed with the secretary of state to create a sole proprietorship. Registration of Assumed Business Name If a sole proprietorship intends to operate under a name other than the owners name, the owner must register the assumed business name or trade name with the secretary of state to (1) reserve use of the name and (2) prevent other businesses from operating with deceptively similar names. Licensing The secretary of state and the counties in which a business is operating may require a business license. The purpose of such licensing is to regulate businesses, maintain business standards, protect existing business interests, and protect the public (e.g., by requiring background checks on companies that intend to work in residential environments). Management

 Sole proprietorships are managed at the policy level by their owners. Many sole proprietorships, however, hire employees (agents) to run the daily operations of their business. Liability Sole proprietors are personally liable for the debts and obligations of their business.
business liability: business assets (desks, chairs, bank accounts)

personal liability: personal assets (home, cars, savings accounts)

Contract Liability Limitations A sole proprietor may limit, to some degree, personal liability that may result from a breach of contract. The following language, if inserted into a contract with others (such as vendors, etc.), may limit the owners personal responsibility for business debts: Obligations due on or created by the contract, or a breach thereof, will be limited to and payable solely from the businesss assets.

 Personal assets of proprietor shall not be liable for debts created by this contract, or a breach thereof. Note: Obviously, this doesnt work in the event of a tort (e.g., accident). Bonding and Insurance Sole proprietors can limit the personal liability through bonding and liability insurance. While both are forms of insurance, their purpose is different. Bonding ensures that a contract will be performed; liability insurance protects against damage, theft, torts, and so on.
bonding: ensures performance of contract liability insurance: protects against losses and damage (property

damage, theft) Disadvantages Bonding may not be available to high-risk or new businesses. Additionally, it is very costly for many businesses (e.g., businesses that deal with small children) and therefore may be cost prohibitive. Taxation Considerations

 Sole proprietorship business profits = personal income of the sole

proprietor

Taxing the business profits as personal income allows business owners to offset business income with other losses. Termination Upon Death A sole proprietorship automatically terminates on the death of the sole proprietor because a sole proprietorship is merely an extension of the individual. Upon Sale Valuation of a business is based on the tangible assets (tables, chairs, etc.) as well as the general reputation of a business (the goodwill).
Valuation: business assets + goodwill (reputation) Sale Price: look to other business sales or business income for specified

time

Partnership Is an association of two or more persons who have agreed to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves. Two or more persons may also, form a partnership for the exercise of a profession. The owners of a partnership are called partners. Nature of Partnership A partnership is easier to form than a corporation while the former also allows the pooling of resources for some common purposes. The partnership has been employed not only for small operations but also for large scale operations. It may be a small firm selling goods or services at a single location or it may be a large enterprise selling goods or services at different locations. The partnership may be composed of two partners only or an association of dozens of persons. Essential Requisites of a Partnership There are five essential requisites of a partnership. These are:

A contract of partnership which may be oral or written, expresses or implied, subject to the rules contained in Articles 1771 to 1773 of the New Civil Code.

Two or more persons who have the legal capacity to enter into the contract of partnership.

Valuable contribution to a common fund which may consist of money, property or industry.

An intention to divide the profits between or among the partners. Lawful purpose (s).

Characteristics of a Partnership There are five basic characteristics of a partnership. These are: Mutual agency Voluntary association Based on contract Limited life Unlimited liability

Mutual Agency Every partner is an agent of the partnership for the purpose of its business. The act of every partner for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership. This means that the act of each partner, provided that it is within the scope of the business of the partnership, binds the partnership or make the partnership liable to third parties. Voluntary Association A partnership is a voluntary association in as much as no person can be forced against his will to become a partner to a partnership. This is because a partner is responsible for the business acts of his partners when the acts are within the scope of the business of the partnership; and, also, because a general partner in unlimitedly liable for the partnership debts. Consequently, it is only fair that a person be permitted to select the people he wishes to join with in a partnership. Based on contract A partnership excludes from its concept all other associations which do not have their origin in the contract. To form a partnership, all that is required is that two or more competent people agree to become partners.

Their agreement, be it oral or in writing, becomes a contract that binds all the partners. If in writing, the contract is generally referred to as the Articles of Co-Partnership. Limited Life In as much as the partnership is a relationship that originates from a contract between or among individuals, any change in the relationship terminates the contract and dissolves the partnership. The partnership is dissolved by the death or withdrawal of a partner, the insolvency of a partner, the termination of a project or purpose for which the partnership has been formed, or the termination of the period specified in the contract or agreement of partnership. This does not, however, mean that the business will cease its operation. It may or it may not. If the remaining partners decide to continue the business, they may do so by forming a new partnership agreement. They may even invite new partners into the business. If, on the other hand, the remaining partners to liquidate the business, then the business ceases operation. Unlimited Liability

 A partnership is said to have unlimited liability in as much as the liability of a partner extends beyond his interest in the partnership. Our law states that all partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted. In other words, creditors can run after the personal assets of the partners (except limited partners), after all the partnership assets have been exhausted, for the settlement of their claims on the partnership. Classification of Partnerships Partnerships may generally be classified on the basis of: Scope of business operations General Partnership Special Partnership Liability of members General partnership Limited partnership Object of the partnership Universal partnership

 Particular partnership General Partnership (as to scope) Is organized to engaged in a general line of business ( trading or manufacturing) or for the exercise of a certain profession (service) during the period of its existence. A general partnership engaged in trading or manufacturing is referred to as a trading partnership while a general partnership engaged in service activities is referred to as a nontrading partnership. Special Partnership Is organized for a specific task or project, the completion of which shall automatically dissolve the partnership and terminate its existence. General Partnership (as to liability) Is one in which all the members are general partners, i.e., all of the partners are personally liable for partnership debts. The creditors of the partnership can run after the personal assets of all the partners they being general partners, after all of the partnership assets have been exhausted. Limited Partnership

 Is one in which there is at least one (but not all) limited partner. In a limited partnership, not all of the partners can be limited partners. There should be at least one general partner to assume unlimited liability. Universal Partnership May refer to all the present property or to all of the profits. In a universal partnership of all present property, the partners contribute all their property to a common fund with the intention of dividing the property and all the profits they may acquire therewith among themselves. A universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership. In other words, in the universal partnership of all property, the property becomes the common property of all the partners because ownership of the said property passes to the partnership while the property in a universal partnership of profits which each of the partners may possess at the time of the formation of the partnership shall continue to pertain

exclusively to each, the usufruct or only the use of which shall pass on to the partnership. Particular Partnership

 Has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. Classification of Partners Partners may be classified under several bases: As to liability General partner Limited partner As to contribution Capitalist partner Industrial partner As to management of the firm Managing partner Ostensible partner Nominal partner Secret partner

 Silent partner Dormant partner General Partner Is one who assumes unlimited liability, i.e., he is liable for partnership debts up to the extent of his personal assets. Limited Partner Is one who is liable for partnership debts only up to the extent of his interest in the partnership. Capitalist Partner Is one who contributes money or property. Industrial Partner Is one who contributes only his industry or personal service. Managing Partner Is one who manages the affairs of the business of the partnership. He may be appointed as such either in the Articles of Co-Partnership or after the Constitution of the partnership.

Ostensible Partner Is one who takes active part in the partnership and known to the public as a partner in the business, whether or not he has an actual interest in the firm. If he is not actually a partner, he is subject to liability by the doctrine of estoppel. Nominal Partner Is one who is not really a partner having no financial interest in the partnership, but is represented as being in fact a partner and, therefore, liable as a partner. He is a partner in name only by permitting the use of his name either for accommodation or for consideration. Secret Partner Is one who has financial interest in the firm and takes active part in the business but is not known or held out to outside parties as a partner. Silent Partner Is one who has financial interest in the firm but does not take active part in the business although he may be known to be a partner by outside parties. He need not be a secret partner. Dormant Partner

 Is one who has financial interest in the firm but who does not take active part in the management and is not known or held out as a partner. Corporation Is an artificial body organized in accordance with the provision of aw in which ownership is divided into shares of stocks. The Corporation Code of the Philippines defines a corporation as an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Five or more persons are required to organize a corporation. The owners of a corporation are called shareholders or stockholders. Characteristics of a Corporation Separate legal existence Transferable unit of ownership Limited liability of stockholders Continuity of existence Centralized management by the Board of Directors

Classification of Corporations As to purpose. The Corporation Code of the Philippines implies two types of corporations according to purpose. These are: Public corporation. These are corporations formed or organized for the government of a portion of the state, i.e., for political or public purpose connected with the administration of government. They are also called municipal corporations or local governments. Examples are barrios, cities, municipalities, and provinces. Private Corporations. These are corporations formed other than for the government of a portion of a state. They are formed for some private purpose, benefit, or end. Other classifications under this heading are: Quasi-public corporations Government-owned or controlled corporations As to how membership is represented. The Corporation Code of the Philippines, Section 3, classifies corporations under this basis as: Stock corporations Non-stock corporations

 As to the state of incorporation. Domestic corporations Foreign corporations As to admission of stockholders. Open corporations Closed corporations Parties to a Corporation Corporators are those who compose the corporation whether stockholders (for a stock corporation) or members (for a non stock corporation). Hence, corporators include incorporators, stockholders, or members. Incorporators are those corporators mentioned in the articles of incorporation as originally forming and composing the corporation and who executed and signed the articles of incorporation as such. There should be at least five but not more than fifteen incorporators.

 Stockholders/Shareholders are owners of shares of stock in a stock corporation. Stockholders may be natural or artificial persons (other corporations) but only natural persons can be incorporators. Members are corporators of a non-stock corporation who do not own capital stock. Promoters are persons who undertake to form and organize a corporation by bringing together the incorporators or the persons interested in the enterprise. They procure subscriptions or capital for the corporation and set in motion the machinery which leads to the incorporation of the corporation itself. Board of Directors We have already learned that the management of a corporation is vested in the board of directors who are elected by the stock holders or members among themselves. The Board of Directors shall not be less than five or more than eleven. The right to vote in stockholders meetings The right to share in the profits The right to share in the distribution of assets upon liquidation of the corporation

 The right to purchase enough shares in case of new issues so as to be able to maintain his proportionate interest in the corporation. This is called stockholders preemptive right. Organization of a Corporation Promotion Incorporation Formal organization and commencement of business operations Promotion Refers to bringing together of the incorporators and person interested in forming a corporation and procuring subscriptions or capital for the corporation. Incorporation Registration of business name Drafting and execution of the Articles of Incorporation by the incorporators. Treasurers affidavit execution. Filling of the Articles of Incorporation with the Securities and Exchange Commission together with the treasurers affidavit.

 Issuance by SEC of the Certificate of Incorporation Formal Organization Adoption of By-Laws Election of Board of Directors Election of Officers Commencement of business operations The Articles of Incorporation The Articles of Incorporation must substantially contain the following matters as required by section 14 of the Corporation Code: Name of the corporation; Specific purpose or purposes for which the corporation is formed; Location or principal place of business; Term for which the corporation is to exist, not exceeding fifty years; Names, nationalities, and residences of the incorporators;

 Names, nationalities, and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified. In case of stock corporations, the amount of its authorized capital stock, the number of shares into which it is divided, and the par value of each share (in case of par value shares). In case of stock corporations, the names, nationalities, and residences of the original subscribers and the amount subscribed and paid by each on his subscription. In case of non-stock corporations, the amount of its capital, the names, nationalities, and residences of the contributors and the amount contributed by each. Such other matters as are not inconsistent with law and which the incoporators may deem necessary and convenient.