Forms of Business Organizations

Forms of Business Organizations

1. Sole proprietorship

                A business organized by one person. Usually, this kind of business organization is a small service-type businesses and retail establishments. Which the owner receives all profits, absorbs all losses and is solely responsible for all debts of the business. The sole proprietorship (owner) is distinct from its proprietor (business). Accounting records of the sole proprietorship do not include the proprietor's personal financial records.

It has to be registered to the following government agencies:

- Department of Trade and Industry (DTI)

- Local Government where business is located ( Barangay & Mayor's Office)

- Bureau of Internal Revenue

- If you have employees { Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), Home Mutual Development Fund ( PAG-IBIG)}

2. Partnership

                A business owned by two or more individuals who contribute money, property and talent. These individuals are called partners. They share in the management of the business and naturally share the profits among themselves. The partnership (business) as a separate organization, distinct from the personal affairs of each partner.

It has to be registered to the following government agencies:

     - Articles of Co-Partnership approved by the Securities and Exchange Commission (SEC)

     - Local Government where business is located ( Barangay & Mayor's Office)

     - Bureau of Internal Revenue

     - Social Security System (SSS)

     - Philippine Health Insurance Corporation (PhilHealth)

     - Home Mutual Development Fund ( PAG-IBIG)

3. Corporation

                It is 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. A business owned by its stockholders. The shareholder or stockholder whose have a right over the business is expressed in the number of shares bought and is evidenced by a certificate of stock. A corporation cannot be managed by all the shareholders. Because it is managed by a Board of Directors elected by the shareholders from among themselves; considering the number of shareholders allowed to invest, a huge amount of capital can therefore be obtained. The corporation is a separate legal entity which mean it is separate from personal affairs of shareholders.

-  It has to be registered to the following government agencies:

     - Articles of Incorporation approved by the Securities and Exchange Commission (SEC)

     - Local Government where business is located ( Barangay & Mayor's Office)

     - Bureau of Internal Revenue

     - Social Security System (SSS)

     - Philippine Health Insurance Corporation (PhilHealth)

     - Home Mutual Development Fund ( PAG-IBIG)

Partnership part 1

Partnership

Partnership is a form of business where two or more persons bind themselves to contribute of money, property or industry to a common fund with the intention of dividing the profits among themselves. To be in short, it is a business that form by two or more persons to share ownership.

Characteristics of a Partnership

1. Mutual Fund

It is the activity before forming a partnership. Partners must contribute a money, property or industry in order to make a common fund.

2. Division of Profits or Losses

It is the essence of the business. One partner can't acquire the entire profits of the firm. It must be share to all partners by using profits sharing ratio. However, sharing of losses is up to the partners whether the losses will be shared by all the partners. If it silent, then the losses will be split based on profit sharing ratio.

3. Co - Ownership of Contributed Assets

All assets contributed into business are owned by all the partners or co - owners in the business.

4. Mutual Agency

It is the right of each partner to act as agent on behalf of the business. With this agreement, the partner who act as agent has the power to make business decisions, such as creating a contract with a third party.

5. Limited Life

There is no forever just like in business. The life of a partnership is based on the contract if it stated the years that business will exist. It may be dissolved by the admission, death, insolvency, incapacity, withdrawal of the partner or expiration in the partnership agreement.

6. Unlimited Liability

All partners (except limited partners) are personally liable for all debts of partnership that can't pay. If one partner is insolvent, the other partners can be liable to satisfy the creditors' claims.

7. Income Taxes

Partnership does not pay the income taxes by itself. It is the partners, who will pay the income taxes on their shares in the business income. All partnerships ( except general professional partnership ) are subject to tax at the rate of 30% of taxable income.

8. Partners' Equity Account

It represents as owner's contribution to the business as well as their shares. It compose of capital account and withdrawal account.

Payback Period

How To Compute Payback Period

Payback Period

The payback period shows how long it takes to recover its investment. It is used to calculate the length of time required to earn back the expense acquired in the investments through the successive cash inflows. 

The decision criterion in payback period:
• The shorter period, the better
• The longer period, the worse

Payback Period (Even Cash Inflows)

Formula: 

Payback period = Cost of investment / Net Cash Inflows

Example:

Problem 1

Red is considering the purchase of a xerox machine that cost P 35,000 and which will generate P 17,500 per year of net cash flow. Compute the payback period.

Solution 1

Payback period = P35,000 / P17,500 = 2.0 years
Therefore, the payback period for this capital investment is 2.0 years.
Problem 2
Rose project requires an investment of P 800,000 with 5 years useful life, no salvage value, and uses straight line method of depreciation. Here are the other data:
Expected sales revenue P 2,500,000
Out-of-pocket costs 1,600,000
Tax rate 30%
Compute the payback period.
Solution 2
First, determine the net cash inflows.

Sales P 2,500,000

Less:Pocket costs (1,600,000)

Deprection expense  

(800,000 / 5 yrs.) (160,000)

Profit Before Interest and Taxes P 740,000

Less: Tax rate ( 30% )

(PBIT x 30%) (222,000)

Profit P 518,000

Add: Depreciation expense 160,000

Net Cash Inflows P 678,000

Second, compute the payback period
Cost of Investment = 800,000
Net Cash Inflows = 678,000 Payback period = 800,000 / 678,000 = 1.18 yrs

Therefore, the payback period for this capital investment is 1.18 years.

Payback Period (Uneven Cash Inflows)

Formula:

Payback period = Years before full recovery + ( Unrecovered cost at the start of the year / Cash Flow during the year)


Example:

Problem 3

Rose will have an investment of P 200,000 is expected to generate the following cash inflows in five years:

Year 1 - P 90,000
Year 2 - P 70,000
Year 3 - P 80,000
Year 4 - P 60,000
Year 5 - P 40,000

Solution 3

Unrecovered cost = 200,000 - 160,000 = 40,000

Cash Flow during the year = 80,000 (Year 3)

Years before full recovery = 2 years (Year 1 & Year 2)

Payback period = 2 + (40,000 / 80,000)

                          = 2 + 0.5

                          = 2.05 years

Therefore, the payback period for this capital investment is 2.05 years.