Introduction
A business organization is an institution created to undertake commercial activities. Generally, there are various types of enterprises, including sole proprietorships, limited liability companies, corporations, and partnerships. These entities have distinct salient features, such as ownership structures, legal and financial requirements, financial composition, and separate existence from the owners. Moreover, the adopted type directly impacts the extent of legal liability of the proprietors and the enterprise’s formation and operational costs.
This implies that investors and entrepreneurs consider a wide range of factors before deciding on the type of business organization to incorporate. For instance, the limited regulation and few legal requirements make the sole proprietorship an easy venture to start and manage. Conversely, the formation and operations of corporations are costly, have complex paperwork, and are guided and monitored by stringent sets of laws. Although sole proprietorships have easy setups and the owners receive the business’ profits, they have unlimited liability, few options of raising capital, and their existence is bound to that of the investors.
Sole Proprietorships
Sole proprietorships are unincorporated, the simplest, and the most common business establishments. They are owned and operated by a single person for their benefit, and there is no separate identity between the proprietors and the entity. This implies that the owner and the business are the same, with the former being solely responsible for the undertakings of the establishment. This is linked with the organization’s continuity and existence, which are entirely dependent on the proprietor’s decisions or events affecting his health or financial wellbeing (Nieminaa et al., 2019). For instance, such occurrences as bankruptcy, incapacitation, death, insanity, imprisonment, or other personal misfortunes will lead to the firm’s closure.
Sole proprietorships have various salient features, which contribute to their outstanding popularity and widespread establishment. Among such characteristics is the absence of extensive legal formalities or regulatory frameworks governing the functions, workings, or operations of these entities. There is no requirement for any kind of incorporation or registration on set up, operational duration such as publication of financial statements, and closure. In most instances, only an operating license or permit is necessary.
Additionally, the operator exercises full control of the firm, does not share profits obtained from the business and is not answerable to other people. From this perspective, a sole proprietorship is the easiest commercial enterprise to establish and manage compared to other entities due to the limited paperwork and legal regulations to comply with during the formation and operating period.
However, sole proprietorships have various disadvantages, which impede their success and significantly discourage their creation. For instance, the unlimited personal liability for any losses incurred during the conduct of the business is a major drawback. This implies that in sole proprietorships, the assets and properties held by the owners, such as finances, houses, or cars, are exposed to risks of seizure to offset such liabilities (Harris, 2020).
These business formations also have few options of raising capital, limiting their expandability or capacity to withstand huge losses. Additionally, sole proprietorships are interlinked to the operators’ wellbeing, implying that eventualities that adversely affect the operating capacity of the owner lead to the firm’s closure. However, these businesses cannot succeed if the operators do not have the requisite managerial capabilities.
Overall, sole proprietorships are potentially profitable business organizations if the owners plan and manage them effectively. The absence of complicated legal requirements, full control by the proprietors, absorption of all profits, and easy formalities on set up make it an attractive business for investors. However, the unlimited liability, few options of raising capital, and the indistinctiveness between the owners and the business are fundamental factors to be exhaustively evaluated against the accruing benefits before deciding on a sole proprietorship.
Partnerships
Partnerships are business organizations established and jointly owned by two or more persons. These are also common enterprises and typically adopt a limited or general structure. Notably, forming and establishing a partnership is comparably complex than sole proprietorships, although it is relatively inexpensive and easy. A limited partnership requires a drafted formal agreement between the individuals entering into the cooperation, and they are also legally obligated to file a partnership certificate with the relevant government authority.
According to Artunc and Guinnane (2019), the partnership deeds are paramount documents, enumerating various critical components, specifying the partners’ responsibilities, duties, and rights, thereby minimizing the risk of disputes. A limited partnership allows the partners to limit the extent of their liability for business losses and debts to the portion of their investment or ownership. Their personal assets and possessions are protected from seizures by creditors.
General partnerships are owned by two or more individuals, and the maximum number is limited to 20. The people agree to share the business’ losses, profits, and liabilities. Notably, this model does not require a formal agreement, which indicates that their cooperation can be verbal or even implied. However, this type of business formation is considerably unpopular due to the double taxation imposed on the earnings of the entity and the proceeds shared by the partners. Additionally, there is a distinct loss of autonomy as all partners are expected to consult and deliberate on a given issue before any resolution can be made.
Despite the slow pace of decision-making, the consultative aspect enhances the quality of conclusions, which can stimulate the performance of the business (Fenton, 2020; Band & Frith, 2017). Therefore, partnerships benefit from the diverse skills, perspectives, and contributions from the members, which fosters better strategies and approaches than the sole proprietorship.
Corporations
Corporations are artificial legal entities whose existence is separate and distinct from that of the shareholders or owners. This type of business organizations is characterized by their similarity to a natural person in reference to the extent to which they enjoy various rights and undertake responsibilities. For instance, these entities have the capacity to sue and be sued, enter into contractual agreements, pay taxes, and own properties (Mion & Adaui, 2020).
A fundamentally distinctive element of these commercial enterprises the aspect of limited liability, implying that the owners and shareholders are not personally liable for the debts or losses incurred by the firm (Mion & Adaui, 2020). However, these organizations require elaborate and complex paperwork to facilitate their formation, have high operational costs, and are obligated to comply with numerous regulatory and legislative frameworks.
Advantages of Doing Business as a Corporation
Unlike natural persons, corporations have perpetual existence as long as they are profitable, implying that they can outlive the shareholders. Corporations are distinctively identified by their legal fiction status, which is their most salient feature (Mion & Adaui, 2020). They enjoy greater access to capital and have perpetual continuity compared to sole proprietorship and partnerships. Additionally, the personal assets and properties of the owners cannot be seized to offset the firm’s debts or losses.
The Concept of Legal Fiction
Corporations are legal fictions with the capacity to undertake some of the things that natural people. This implies that these business establishments are entities equipped with a range of legal capacities to facilitate the shareholders to conduct business operations as a distinct entity. In this regard, they have separate existence and personality from the owners (Gaakeer, 2016). The law grants these organizations the powers and capabilities to enjoy specific rights and undertake certain responsibilities as though they were natural persons. From this perspective, the personhood enjoyed by these organizations is an outcome of legislative works and not obtained through a natural process (Gaakeer, 2016). For instance, just like an ordinary individual, a corporation can initiate legal proceedings against people or entities, be subjected to litigation, enter into contractual agreements, borrow money, lend finances, and own assets.
Evaluation of the Best Setup
Although sole proprietorships and partnerships have various advantageous features, a corporation is the best setup with the least risks. This implies that despite the diversity of skills, competencies, experiences, knowledge, and talent of the sole trader and partners in cooperation, several inherent disadvantages impede the success of these entities. According to Dias and Teixeira (2017) and Atsun (2016), partnerships and sole proprietorships are intrinsically predisposed to the high failure rate. For instance, a disagreement or resignation of a partner from a partnership leads to the dissolution of the cooperation. Similarly, any unfortunate eventuality befalling a sole trader results in the closure of the business. However, corporations cannot collapse because of the shareholders’ acrimony, death, or incapacity. From this perspective, a corporation is a better business set up than a partnership or a sole proprietorship.
Salient Differences Between the Old and New Corporation Code of the Philippines
The Revised Corporation Code (RCC) of the Philippines contains various salient provisions, which depart significantly from the previous version. Among such inclusions is contained in the organization of corporations, which now make it possible for one person to establish a company from the previous five (Securities and Exchange Commission, n.d.). Also, no minimum capital stock is required for a business to register and commence operations (Admin, 2020). Additionally, the corporate term tenure of 50 years has been voided to allow for the perpetual existence unless expressly limited by the entity’s Articles of Association.
Moreover, the new dispensation supports online business registration, application of licenses, and other authorizations in a bid to improve access and enhance efficiency (Admin, 2020). Further, corporations undertaking public interest businesses are now subject to additional stringent regulations, integrates provisions that bring the Code to international standards, enhance better governance, and make it easier for foreigners to invest. Another notable departure is the increase in the security deposit that multinationals are required to deposit from the Philippines peso 100,000 to 500,000, to ensure such organizations can meet debts or organizations incurred in the country.
Recommended Business Organization
From the evaluation of the various business models, I would recommend the corporation as the ideal commercial enterprise. This view is supported by the ease of raising financial resources, the limited scope of liability, and perpetual existence. Additionally, corporations can recruit specialized management, which is integral for the effective administration of operations. Sole proprietorships and partnerships do not enjoy these benefits and advantages, making a corporation the ideal organization to establish.
Conclusion
Conclusively, sole proprietorships and partnerships are advantageous since they have few legal formalities, relatively easy starting and management, and flexibility. However, these business formations have limited liability, are constrained in raising additional capital, and their existence is unpredictable. However, corporations enjoy perpetual existence, have separate legal status from that of their shareholders and owners, and have unlimited liability. Therefore, a corporate is the ideal type of business organization to establish.
References
Admin. (2020). Business in the Philippines. Kittelson Carpon Consulting. Web.
Artunc, C., & Guinnane, T. W. (2019). Partnership as experimentation. The Journal of Law, Economics, & Organization, 35(3), 455−488. Web.
Atsan, N. (2016). Failure experiences of entrepreneurs: Causes and learning outcomes. Procedia – Social and Behavioral Sciences, 235, 435−442. Web.
Bang, D., & Frith, C. D. (2017). Making better decisions in groups. Royal Society Open Science, 4(8), 170−193. Web.
Dias, A., & Teixeira, A. A. C. (2017). The anatomy of business failure. European Journal of Management and Business Economics, 26(1), 2−20. Web.
Fenton, M. (2020). Decision making in the partnership. BDJ in Practice, 33(11), 30. Web.
Gaakeer, J. (2016). “Sua cuique persona?” A note on the fiction of legal personhood and a reflection on interdisciplinary consequences. Law & Literature, 28(3), 287−317. Web.
Harris, R. (2020). A new understanding of the history of limited liability: An invitation for theoretical reframing. Journal of Institutional Economics, 16(5), 643−664. Web.
Mion, G., & Adaui, C. (2020). Understanding the purpose of benefit corporations: an empirical study on the Italian case. International Journal of Corporate Social Responsibility, 5(1), 1−15. Web.
Niemimaa, M., Jarvelainen, J., Heikkila, M., & Heikkila, J. (2019). Business continuity of business models: Evaluating the resilience of business models for contingencies. International Journal of Information Management, 49, 208−216. Web.
Securities and Exchange Commission. (n.d.). Revised corporation code salient points. Web.