Legal Forms of Business Organization, The Firms and Its Environment

1. Lesson 3
Legal Forms of Organization
for the Small Business &
The Firms & It’s
Environment
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2. Learning Objectives:
1.Understand the different legal forms that a small
business can take.
2.Explain the factors that should be considered
when choosing a legal form.
3.Understand the advantages and disadvantages of
each legal form.
4.Explain why the limited liability company may be
the best legal structure for many small
businesses.
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3. OVERVIEW:
Every small business must select a legal form of
ownership. The most common forms are sole
proprietorship, partnership, and corporation.
A Limited Liability Company (LLC) is a relatively
new business structure that is now allowed by all
fifty states. Before a legal form is selected,
however, several factors must be considered, not
the least of which are legal and tax options.
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4. Factors to Consider
The legal form of the business is one of the
first decisions that a small business owner
will have to make. Because this decision will
have long-term implications, it is important
to consult an attorney and an accountant to
help make the right choice. The following are
some factors the small business owner should
consider before making the choice:
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5. 1.The owner’s vision. Where does the
owner see the business in the future (size,
nature, etc.)?
2.The desired level of control. Does the
owner want to own the business personally
or share ownership with others? Does the
owner want to share responsibility for
operating the business with others?
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6. 3.The level of structure. What is desired—a
very structured organization or something
more informal?
4.The acceptable liability exposure. Is the
owner willing to risk personal assets? Is the
owner willing to accept liability for the
actions of others?
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7. 5.Tax implications. Does the owner want to
pay business income taxes and then pay
personal income taxes on the profits
earned?
6.Sharing profits. Does the owner want to
share the profits with others or personally
keep them?
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8. 7.Financing needs. Can the owner provide
all the financing needs or will outside
investors be needed? If outside investors
are needed, how easy will it be to get
them?
8.The need for cash. Does the owner want
to be able to take cash out of the business?
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9. The final selection of a legal form will
require consideration of these factors and
tradeoffs between the advantages and
disadvantages of each form. No choice will
be perfect. Even after a business structure
is determined, the favorability of that
choice over another will always be subject
to changes in the laws.“
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10. Sole Proprietorship
A Sole Proprietorship is a business that is owned and
usually operated by one person. It is the oldest, simplest, and
cheapest form of business ownership because there is no legal
distinction made between the owner and the business
(see Table "Sole Proprietorships: A Summary of Characteristics").
Sole Proprietorships are common in a variety of industries, but the
typical sole proprietorship owns a small service or retail operation,
such as a dry cleaner, accounting services, insurance services, a
roadside produce stand, a bakery, a repair shop, a gift shop,
painters, plumbers, electricians, and landscaping services. the sole
proprietorship is the choice for most small businesses.
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11. Liability Taxes Advantages Disadvantages
Unlimited:
owner is
responsible
for all the
debts of the
business.
No special
taxes; owner
pays taxes on
profits; not
subject to
corporate taxes
 Tax breaks
 Owner retains all
profits
 Easy to start and
dissolve
 Flexibility of
being own boss
 No need to
disclose business
information
 Pride of
ownership
 Owner absorbs all
losses
 Unlimited liability
 Difficult to get
financing
 Management
deficiencies
 Lack of stability in
case of injury, death,
or illness
 Time demands
 Difficult to hire and
keep highly
motivated
employees
Table 1. Sole Proprietorships: A Summary of Characteristics
•Source: John M. Ivancevich and Thomas N. Duening, Business: Principles, Practices, and Guidelines (Mason,
OH: Atomic Dog Publishing, 2007), 60; David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken,
NJ: John Wiley & Sons, 2011), 163;
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12. 2. Partnership
A Partnership is two or more people voluntarily
operating a business as co-owners for profit. Partnerships
make up more than 8 percent of all businesses in the United
States and more than 11 percent of the total revenue. Like the
sole proprietorship, the partnership does not distinguish between
the business and its owners (see Table "Partnerships: A
Summary of Characteristics"). There should be a legal
agreement that “sets forth how decisions will be made, profits will
be shared, disputes will be resolved, how future partners will be
admitted to the partnership, how partners can be bought out, and
what steps will be taken to dissolve the partnership when needed
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13. There are two types of partnerships. In the General
Partnership, all the partners have unlimited liability, and
each partner can enter into contracts on behalf of the
other partners.
A Limited Partnership has at least one general partner
and one or more limited partners whose liability is limited
to the cash or property invested in the partnership.
Limited partnerships are usually found in professional firms,
such as dentists, lawyers, and physicians, as well as in oil
and gas, motion-picture, and real-estate companies.
However, many medical and legal partnerships have switched
to other forms to limit personal liability
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14. Before creating a partnership, the partners
should get to know each other. According to
Michael Lee Stallard, cofounder and president of
E Pluribis Partners, a consulting firm in
Greenwich, Connecticut, “The biggest mistake
business partners make is jumping into
business before getting to know each
other…You must be able to connect to feel
comfortable expressing your opinions, ideas
and expectations
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15. Liability Taxes Advantages Disadvantages
Unlimited for
general
partner; limited
partners risk
only their
original
investment.
Individual
taxes on
business
earnings; no
income taxes
as a business
 Owner(s) retain all profits
 Unlimited for general
partner; limited partners
risk only their original
investment. Individual
taxes on business
earnings; no income taxes
as a business
 Easy to form and dissolve
 Greater access to capital
 No special taxes
 Clear legal status
 Combined managerial
skills
 Prospective employees
may be attracted to a
company if given incentive
to become a partner
 Unlimited financial
liability for general
partners
 Interpersonal conflicts
 Financing limitations
 Management
deficiencies
 Partnership
terminated if one
partner dies,
withdraws, or is
declared legally
incompetent
 Shared decisions may
lead to disagreements
Table 2. Partnerships: A Summary of Characteristics
Source: John M. Ivancevich and Thomas N. Duening, Business: Principles, Practices, and Guidelines (Mason, OH: Atomic Dog
Publishing, 2007), 64–65; David L. Kurtz, Contemporary Business, 13th Edition Update (Hoboken, NJ: John Wiley & Sons, 2011), 163;
15

16. 3. Corporation
A Corporation “is an artificial person created by law,
with most of the legal rights of a real person. These
include the rights to start and operate a business, to buy
or sell property, to borrow money, to sue or be sued,
and to enter into binding contracts (see Table
"Corporations: A Summary of Characteristics"). Corporations
make up 20 percent of all businesses in the United States,
but they account for almost 90 percent of the
revenue. Although some small businesses are incorporated,
many corporations are extremely large businesses—for
example, Walmart, General Electric, Procter & Gamble,
and Home Depot.
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17. Liability Taxes Advantages Disadvantages
Limited; multiple taxation
 Limited liability
 Skilled management
team
 Ease of raising capital
 Easy to transfer
ownership by selling
stock
 Perpetual life
 Legal-entity status
 Economies of large-
scale operations
 Double taxation
 Difficult and expensive
to start
 Individual stockholder
has little control over
operations
 Financial disclosure
 Lack of personal
interest unless
managers are also
stockholders
 Credit limitations
 Government regulation
and increased
paperwork
Table 3. Corporations: A Summary of Characteristics
•Source: “How—and Why—to Incorporate Your Business,” Entrepreneur, accessed February 3, 2012,
• http://www.entrepreneur.com/article/77730;
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18. Liability Taxes Advantages Disadvantages
Limited;
owners taxed
at individual
income tax
rate
 Limited liability
 Taxed at individual
tax rate
 Shareholders can
participate fully in
managing company
 No limit on number
of shareholders
 Easy to organize
 LLC members can
agree to share profits
and losses
disproportionately
 Difficult to raise
money
 No perpetual life
 Is dissolved at death,
withdrawal,
resignation,
expulsion, or
bankruptcy of one
member unless there
is a vote to continue
 No transferability of
membership without
the majority consent
of other members
Limited Liability Company
The limited liability company is a relatively new form of business ownership that is now permitted in all fifty states, although
the laws of each state may differ.
Table 4. Limited Liability Companies: A Summary of Characteristics
•Source: Annalyn Censky, “Business Structures 101,” CNN Money, August 4, 2008, accessed February 3,
2012, http://cnnmon.ie/MDaxXN; “Limited Liability Company
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19. KEY TAKEAWAYS
 Every small business must select a legal form of ownership. It is one of the first decisions that
a small business owner must make.
 The most common forms of legal structure are the sole proprietorship, the partnership, and the
corporation. An LLC is a relatively new business structure.
 When deciding on a legal structure, every small business owner must consider several
important factors before making the choice.
 The sole proprietorship is the oldest, simplest, and cheapest form of business ownership. This
business structure accounts for the largest number of businesses but the lowest amount of
revenue. This is the choice for most small businesses.
 A partnership is two or more people voluntarily operating a business as co-owners for profit.
There are general partnerships and limited partnerships.
 A corporation is an artificial person with most of the legal rights of a real person. Corporations
make up about 20 percent of all businesses in the United States, but they account for almost
90 percent of the revenue.
 Small businesses that are incorporated outperform unincorporated small businesses in terms
of profitability, employment growth, sales growth, and other measures.
 The LLC is a hybrid of a sole proprietorship and a corporation. It is the best choice for most
small businesses.
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20. Activities/Assessment:
1.Select three small businesses of different sizes: small, medium,
and large. Interview the owners, asking each about the legal
structure that the owner chose and why. If any of the businesses
are sole proprietorships, ask the owner if an LLC was considered.
If not, try to find out why it was not considered.
2.Frank’s BarBeQue is currently a sole proprietorship. Frank’s son,
Robert, is trying to persuade his father to either incorporate or
become an LLC. Assume that you are Robert. Make a case for
each legal structure and then make a recommendation to Frank. It
is expected that you will go beyond the textbook in researching
your response to this assignment.
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22. Learning Objectives:
1. Identify the various forces/elements of the firms’
environment and
summarize these forces using the PEST and SWOT analysis.
• 2. Describe the local and international business
environment of a firm.
• 3. Explain the role of business in relation to the
economy, discuss the different phases of economic
development, and differentiate the various forms of
business organization.

24. The environment in which a business operates
is a major consideration in determining an
organization’s design or structure.
Environmental Scanning = Seeking for and
sorting through data about the environment.
Environmental Forces and
Environmental Scanning

25. MOST SIGNIFICANT PROBLEMS
THAT COMPANIES FACE TODAY
1. Uncertainty
-The common reaction to
uncertainty is to stick with
manageable short-term goals.
2. Globalization
-is a concern for top company
executives because of the changes it
brings.
-these changes may require costly
adjustments to cope with the
challenges of serving new markets
and new trends.
-m a n a g e r ’ s h a v e t o d e a l w i t h
c u l t u r a l d i f f e r e n c e s a n d v a r y i n g
g o v e r n m e n t r u l e s a n d
r e g u l a t i o n s w h i c h c a n c o m p l i c a t e
t r a d e a n d c o m m e r c e .

26. MOST SIGNIFICANT PROBLEMS THAT
COMPANIES FACE TODAY
3.Innovation
- companies should build a more innovative
culture
in their respective organizations.
- top company executives fear that giving
employees more freedom to develop
new products or service without
supervision from management may
cause them to prioritize individual goals
over company objectives.

27. 4. Government Policies
- companies should adhere to the new
government regulations and policies
on environmental,
• financial, marketing and other
aspects of business
5. Technology
-the significant competitive market
and require companies to stay
informed about changes and make
appropriate adjustment in their
operation,
- investing in technology enables a
company to take advantage of the
next technological developments
and smoothly transition to future
innovation.

28. MOST SIGNIFICANT PROBLEMS THAT COMPANIES FACE TODAY
6. Diversity
- Diversity adds value to products and services since
different ideas and perspectives are utilized in the
process.
7. Complexity
- Globalization and information technology have led
to the emergence of a complex business
environment.
-managers are challenged to develop management
protocols that minimize the complexity of different
tasks.

29. Components of the External Business
Environment: General and Specific
General Business Environment:
ECONOMICS SITUATION= Inflation, rates of interest, changing options
in stock markets and people’s spending habits are some examples of
factors/elements of economic situation.
SOCIO-CULTURAL SITIATION= Include the customers’ changing values
and preferences; customs could also affect management practices in
companies.
For example: Filipino customers are now conscious about the
importance of avoiding fatty foods, so many food companies
now make sure that the products they offer are cholesterol-
free or are low in cholesterol.

30. External Business Environment = refers to the
factors/elements outside the organization which may
affect, either positively or negatively, the
performance of the organization.
Internal Business Environment = refers to the
factor/elements within the organization which may
effect, either positively or negatively, the
performance of the organization.

31. POLITICAL SITUATION- refer to national or local laws, international
laws, and rules ang organizational management
 For example: labor laws related to preventing employers from firing
their employees without due process require the former to allow
the latter to exercise their right to present their position during
disciplinary action before their employment can be terminated.
DEMOGRAPHIC SITUATION= Such as gender, age, education level,
income, number of family members, geographic origin may also
influence some managerial decisions in organizations.
 Example: decisions regarding hiring of human resources maybe
affected by an organization’s management policy that shows
prejudice to the hiring of married females who are in the child-
bearing age

32. TECHNOLOGICAL SITUATION- involve the use of varied
types of electronic gadgets and advanced technology
such as computers, robotics, microprocessors, and
others that have revolutionized business management.
SPECIFIC BUSINESS ENVIRONMENT:
Stakeholders= parties likely to be affected by the
activities of the organization.
Customers= those who patronize the organization’s
product and services.
Supplier= are those who ensure the organization’s
continuous flow of needed and reasonably priced
inputs or materials required for producing their goods
and rendering their services.

33. The Environment of the Firm
Microenvironment
*customers
*suppliers
*Regulatory agencies
*Competitors
External Environment
Macroenvironment
* General environment of the
firm
Internal Environment
*employees
*board of directors
*managers
The Firm

34. STRATEGIC PLANNING: SWOT AND
PEST ANALYSIS
SWOT ANALYSIS
Is a technique that identifies
the Strength and Weaknesses
of a company, as well as the
Opportunities and Threats it
faces.

35. STRENGTHS
(what does your
company do better
than others)
WEAKNESSES
(what aspects of your
company need to be
improved)
OPPORTUNITIES
(What
trends/conditions can
positively impact your
company
THREATS
(what
trends/conditions can
negatively impact your
company)
SWOT

38. STRENGTH
Include the company’s attributes that
give a competitive edge over others.
May include being a market leader, having a
good
brand image, providing quality products
and services.
Having a good reputation in the business.
Include good credit standing
Competent and highly skilled staff
Excellent distribution channels
Outstanding communication and network
systems
Good number of patents

39. WEAKNESS
Are the attributes of a company that need to be
improved or changed.
Examples of weaknesses are:
lack of access to technology
Limited distribution channels
Poor location
Lack of facilities and equipment
Poor transportation systems

40. OPPORTUNITIES
Are factors or events that can give a positive
impact to the company if properly addressed.
Opportunities come in different forms like new
markets, potential profits, additional sources of
raw materials, increased purchasing power of
consumers, better location, and new users or
customers.

41. THREATS
Are external factors which may negatively
impact
the company.
These are trends or changes, or movements
over which the company has no control but
should be addressed to maintain its status in
business.
Examples:
increase in the price of resources, entry of
new competitors and high inflation rates

42. After conducting the SWOT analysis, a
Company can formulate strategies using
this Matrix
Internal/External Opportunities
(External)
Threats
(External)
Strengths (Internal)
Strengths-
opportunities
(SO) Strategies
Which of the company’s
strengths can be used to take
advantage of the
opportunities identified?
Strengths-threats
(ST) strategies
How can the strengths be
used to minimize the threats
that were identified
Weaknesses (Internal)
Weaknesses-
opportunities
(WO) strategies
Weaknesses-Threats
(WT) strategies
How can the identified
opportunities be used
to address the
company’s
weaknesses?
How can the weaknesses
be minimized to avoid the
impending threats
identifier?

43. Is a method used in analyzing the
Political
Economic
Social
Technological
PESTLE-Local and Environment

44. 44

45. POLITICAL FACTORS
Include:
laws
Regulations
Restrictions
Significant political factors include:
tax policies
Labor laws
environmental laws
trade restrictions
tariffs

46. ECONOMIC FACTORS
Directly affect the capability of business
to generate profits.
Include:
Economic growth
Interest rates
Exchange rates
Inflation rates

47. SOCIAL FACTORS
analyzing social factors can also help a
company implement changes and
improvements in its operations, products and
services.
Includes:
 Demographic aspects, such as age, group
affiliation, religion, civil status and the
economic status of consumers.

48. TECHNOLOGICAL FACTORS
 It includes research and
development activities,
automation, licensing,
patenting, technological shifts,
and outsourcing decisions.

49. THE BENEFITS OF STRATEGIC PLANNING
USING SWOT AND PEST ANALYSES
SWOT analysis and PEST
analysis help companies in
formulating strategies and
aligning their vision and mission to
the general direction of the
business environment where they
operate.