Types of Businesses: Their Advantages and Disadvantages

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Published — January 23, 2019

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Read related Article: Why Ease of Doing Business was called a “gamechanger”

In putting up a business, a person has a lot to consider before finally deciding on what business he would undertake. One of the things he/she must consider is the type of business organization he/she wants to establish. The basic types of business organizations are the following: (1) Sole Proprietorship, (2) Partnership, (3) Joint Venture, and (4) Corporation. Each type of business organizations has their advantages and disadvantages that can help a person decide what type of business will suit his/her preference.

Sole Proprietorship

In this type of business organization, there is only one (1) proprietary owner, a single individual conducts business under his own name or under a business name.  The sole proprietor manages and exercises complete control over the conduct of his business. Only his or his agent’s acts may bind the business.

The existence of the sole proprietorship is dependent upon the life of the proprietor. Upon death of the proprietor, the business operations may cease unless his heirs or other interested persons undertakes to continue his business.

The advantage of being a Sole Proprietorship is that the sole proprietor manages and exercises complete control over the conduct of his business. Also, he is the only one who will benefit in the profits of his business.

However, on the down side, the sole proprietor is the only one personally liable for the business’ obligations.

Partnership

Article 1767 of the New Civil Code states that “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”. It is created by mere agreement of the parties. It may also be formed even by two persons only.

In a partnership, a thing that can be considered as an advantage would be as to transfer of interest in the partnership. It cannot be transferred without the consent of the other partners. Further, the partners may be liable beyond their investment.

Joint Venture

The Supreme Court in the case of Kilosbayan, Inc., et al. v. Guingona, Jr., G.R. No. 113375, May 5, 1994 defined Joint Venture as “an association of persons or companies jointly undertaking some commercial enterprise; generally, all contribute assets and share risks. It requires a community interest in the performance of the subject, a right to direct and govern the policy connected therewith, and duty, which may be altered by agreement to share both in profit and losses”.

Corporations

Section 2 of The Corporation Code of the Philippines states that “A corporation 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 corporation has a personality separate and distinct from its members also know as the Doctrine of Separate Juridical Personality. Under this doctrine, obligations incurred by corporations are not obligations of their officers and shareholders. Obligations of officers and shareholders are not obligations of corporations. In other words, corporate interests are separate from the personal interests of the natural persons that comprise corporations (University of Mindanao, Inc., v. Bangko Sentral ng Pilipinas, G.R. 194964-65, January 11, 2016). However, under the doctrine of piercing the veil of corporate entity, the corporation’s separate juridical personality may be disregarded when there is an abuse of the corporate form (Aquino, Philippine Corporate Law Compendium, 2014 Edition).

One of the advantages of a Corporation is that it continues to exist even if there is a change in those who compose it. Death of a shareholder or transfer of his shares will not affect the continued existence of the corporation.  Also, the liability of the stockholders for corporate obligations is limited to their investment save for exceptions provided by law.

The disadvantage is that it is highly regulated by the Securities and Exchange Commission (SEC). They need to comply with quarterly or annual reportorial requirements with the SEC and those required by other agencies. Special corporations need to submit additional requirements and further regulated by other government agencies. Also, it may pose as a disadvantage to some that stockholders do not participate in the day-to-day management.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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