Abstract This chapter discusses the concept of ownership and what it means in terms of its application to industrial enterprise. The Enterprise Ownership chapter mainly talks about the types and forms of ownership. Moreover, it discusses the advantages and disadvantages of the main ownership forms, namely public and private enterprise. In addition, this chapter also talks about the factors which affect the choice of the form of ownership.
Introduction San Miguel Corporation, SM Group of Companies, Philippine Long Distance Telephone (PLDT) Company, Jollibee Foods Corporation these are some of the names of large businesses in the Philippines which people are familiar with. Along with these big companies and corporations, small scale businesses can also be seen. Some of these are sari- sari stores, bakeries, beauty parlors, car repair shops and the like. With that, some may wonder how those businesses were started. Some may realize those were initiated by either one person or groups of people varying in the business form of ownership and in the way they are organized for operation. A business can be owned publicly or privately. Whenever starting a business enterprise, necessary policy decisions must be established privately owning a business can be in the form of sole proprietorship, partnership, corporation, corporate combinations and cooperative organization. On the other hand, owning it publicly can be in the form of public corporation or non-incorporated public enterprise (1).
Significance of the Chapter Most large-scale enterprises are organized in the form of conventional business corporations, in which the firm or enterprise is owned collectively by investors of capital. Other ownership patterns are prominent in a number of important industries. The common forms of enterprise ownership are proprietorship, partnership, and corporation. However, current types would include firms that are owned by their customers. It is evident that businesses or enterprises have diverse pattern of ownership. Different industries and national economies exhibit different distributions of ownership forms. Whatever type of ownership an enterprise is organized, its main concern is to maximize profit. This chapter is significant as it discusses the different types and forms of enterprise ownership. The knowledge herein would help the readers; particularly the businessmen and future entrepreneurs adapt the best type of ownership appropriate to their enterprise. Knowledge about the form of ownership and the way businesses are organized are keys to successful management of an enterprise. With that, the conditions of production can largely be determined. Furthermore, this chapter gives emphasis on some factors to consider in choosing the type and form of ownership for their enterprise, thus promoting assistance to make sound business decisions.
Objectives of the Chapter The purpose of this chapter is for the reader to: Understand the concept of ownership itself and when applied to industrial enterprise Identify and distinguish the types of enterprise ownership. Describe and distinguish the forms of each type of enterprise ownership. Understand the advantages and disadvantages of the forms of ownership Identify the factors that affect the choice of ownership form and describe how these factors influence the enterprise. Know the importance of ownership in having a successful management of enterprise
Main Discussion Definition of Ownership Ownership is usually defined by words such as possession, property, authority, right, title and claim. However, it is more like having a right to have control over a thing or property. Ownership is a legal term, meaning a legal title to a thing, the right to possession, control, and disposal (1). For most dictionary definitions, ownership is thought as what is owned is ones property (2). However, ownership viewed under rights and legal economic discussions is defined as residual control rights to assets, that is, the right to determine the uses of assets (3). Definition of Enterprise Ownership An ownership when applied to industrial enterprises is called Enterprise Ownership. Riggs and his co- authors from the Industrial Organization and Management book said that this ownership means title to and possession of the assets of the enterprise, the power to determine the policies of operation, and the right to receive and dispose of the proceeds (1). Types of Enterprise Ownership The following are the different types of enterprise ownership: Private ownership: The ownership by an individual and not the government is said to be the private ownership. Here, individual owns and operates their self-owned businesses or property. Example: Sari-sari stores, bakeries, beauty parlors, car repair shops, etc.
Public ownership: A business enterprise is said to be publicly owned when the ownership is by political bodies of government and it was established for the good of the people. In other words, a business organization is wholly or partly owned by the state and controlled by a public authority (5). The government runs the business on behalf of the general public. This type of ownership is also known as common ownership. Example: National Power Corporation (NAPOCOR), Bangko Sentral ng Pilipinas (BSP), Government Service Insurance System (GSIS), Home Development Mutual Fund (PAG-IBIG), etc.
Mixed business units: Type of ownership wherein private and public sectors work together for the good of the enterprise. The business is owned by private and public sectors. Usually, the enterprise is owned by the government and it is operated by private sectors (1). Example: Light Rail Transit (LRT), North Luzon Expressway (NLEX), Philippine Airlines (PAL), etc.
Forms of Public Enterprises The following are the different forms of public enterprise: Public corporation: this form of public enterprise refers to the company or a firm which has issued shares through initial public offering. Any investment, entity or funds owned by government is known to be "public" property. An individual can publicly purchase stock from this enterprise thus, having common public as shareholders or members of the company (6). Example: Land Bank of the Philippines (LBP), Philippine Amusement and Gaming Corporation (PAGCOR), Duty Free Philippines, etc.
Non incorporated public enterprise: this form of public enterprise is established for a specific public purpose by government, usually for the benefit of people (1). Example: Philippine Charity Sweepstakes Office (PCSO), Social Security System (SSS), Philippine Health Insurance Corporation (PHILHEALTH), Overseas Workers Welfare Administration (OWWA), etc. Forms of Private Enterprises The following are the different forms of private enterprise: Individual or Sole proprietorship: this form of private enterprise is owned only by one person. Usually the owner is also the manager of the business. The owner supplies the capital or borrows funds from the banks or other leading institutions (7). All the risks of the business is shouldered by the owner since he is responsible for the management of his/her business. Thus, making the business all in the hands of the sole individual (1). Example: Boutique, sari-sari store, repair shop, housekeeper, tutor, etc. Advantage and Disadvantages of Sole Proprietorship Advantages: The business is owned and operated by a single individual: an individual can operate a sole proprietorship under their own name, or under another name they've chosen. Whats more is that the individual owns 100% of his/her business. He/she is the one that runs his/her small business and no one else can tell them what to do or how to do it. The management and control is in the hands of the owner: The individual has a complete control and decision-making power over the business. He/she may hire employees to help him run the business. The profits earned go to the owner: the owner gets to keep all the profits gained by his/her business. There are no legal formalities: business operation is not governed by any special act or ordinance. Establishing and operating the individuals business is simple and its easy to change the legal structure later if circumstances change. Furthermore, the individual can easily wind up your business. Disadvantages: There is an unlimited liability for debts: when the business is faced by debts, the owner is liable to fix it. The individual himself are held responsible for all the risks to be faced in the business. Nobody else can be blamed when unfortunate events occur. All responsibilities and business decisions fall on the shoulders of the sole proprietor. The finance is shouldered by the owner: the capital to start the business will be provided by the owner. Nevertheless, he/she may also borrow funds from the banks or other leading institutions.
Partnership: this is a form of private enterprise with two or more owners. The owners, called partners, agree on capital contributions, management or the firm, distribution of profits and losses, and other matters pertaining to the operation of the firm (7). Under this form, owners can be general or limited. General partners both manage the business and are responsible for the debts facing the business. On the other hand, limited partners are just responsible to the extent of their investments. They may not be really involved in the management of their business (1). Example: Beauty parlor, barber shop, restaurant, accounting firm, etc. Advantage and Disadvantages of Partnership Advantage: The business is owned by one or more individual: there is this famous quote saying, Two heads are better than one. Having more than one owner in the business makes knowledge and skills wider and would create more room for brainstorming. Thus, the betterment of their business. The finance is shouldered by the owners: with more than one owner, more funds may be contributed. Their funds for their capital may increase as well. There is a sharing of risk when the business is faced by unfortunate events: risk can be lessen since it is faced by two or more individual in the business. The losses of the firm and other associated risk in business are shared by the partners. Disadvantage: The profits are distributed: Profits must be equally shared with others. Disagreements between partners may occur: Since decisions are shared, disagreements can occur. A partnership is for the long term, and expectations and situations can change, which can lead to breaking the bond of their partnership. Also, one have to consult their partner and negotiate more as he/she cannot make decisions by himself/herself. There is an unlimited liability for debts: as a general partnership is that all partners are personally liable for business debts and liabilities.
Corporation: this is a form of private enterprise owned by not less than five persons called shareholders. It is organized by operation of law (7). In a corporation, an individual has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and the appreciation of stock, but are not held personally liable for the company's debts (8). Example: ABS-CBN Corporation, Ayala Corporation, Digital Telecommunications Philippines, etc. Advantage and Disadvantages of Corporation Advantage: The business is owned by groups of persons: The ownership is represented by the number of share certificates held by a person, and this makes the transfer of ownership very easy. There is a limited liability in the business: the shareholders have limited liability for the corporation's debts since a corporation is considered a separate legal entity. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities. Tax payment is manageable: Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. There is a specialized management: Corporations have a set management structure. Shareholders are the owners of a corporation, who elect a Board of Directors, which then elects the officers. Other than the election of directors, shareholders do not typically participate in the operations of the corporation. The Board of Directors is responsible for the management of and exercising the rights and responsibilities of a corporation. The Board sets corporate policy and the strategy for the corporation. The Board elects officers, usually a CEO, vice president, treasurer and secretary, to follow the policies set by the Board and manage the corporation on a day-to-day basis. In a small corporation, the lines between the shareholders, Board of Directors, and officers tends to blur because the same people may be serving in all capacities. Transferring of ownership is possible: Shares of corporations are generally freely transferable because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time. A corporation continues to exist as a separate entity and is not terminated or dissolved even when shareholders dies or sell their shares. Shares of corporations are freely transferable unless shareholders have "buy- sell" agreements limiting when and to whom shares may be sold or transferred. Also, securities laws may restrict the transferability of shares. Continuous Existence: A corporation continues to exist until the shareholders decide to dissolve it or merge with another business. There is a possible tax advantages: Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners (at least in the typical C Corporation). Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits. It can attract investment: The built-in stock structure of a corporation makes it attractive to investors. It is easy to raise a capital: The stock structure also allows corporations to attract key and talented employees by offering an ownership interest in the form of stock options or stock. Disadvantage: Corporation is the most expensive form to organize: It costs money to incorporate. A corporation pays fees for filing the articles of incorporation with the secretary of state, fees for the first year franchise tax prepayment, fees for various governmental filings, and attorney fees. It requires extensive record keeping: lots of paperwork are done in a corporation for reports and tax returns, records about the meetings of shareholders and Board of Directors, licenses, business bank accounts, and others. This is for the corporate formalities that must be followed. Corporate Formalities must be followed: The proper corporate formalities of organizing and running a corporation must be followed in order to receive the benefits of being a corporation. Disclosure of Names of Corporate Officers and Directors. Most states do not require that names of shareholders be a matter of public record; however, many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed with the Secretary of State. Dissolution: Since corporations have a perpetual existence, states provide a mechanism for dissolving a corporation and liquidating its assets. Dissolution does not happen automatically. A corporation can be dissolved voluntarily or involuntarily. A corporation's officers and directors are charged with responsibility for dissolving the corporation, including gathering corporate assets, paying creditors and outstanding claims, and distributing remaining assets to shareholders. Double Taxation: C corporations have potential double tax consequences-once when the company makes its profit, and a second time when dividends are paid to shareholders. S corporations can mitigate this tax issue.
Cooperative Organization: this is a form of private enterprise that is owned and controlled by its shareholders or members. The organization is run for the mutual benefit of its shareholders/members. The organization is established so its shareholders/members may purchase goods or use services of the organization, rather than being established for the purpose of earning profits for investors (9). Example: Marketing Assistance for the Development of Entrepreneurs in Cooperatives (MADE), Nationwide Public Hearing on Standard Chart of Accounts (SCA) for Transport Cooperatives, etc.
Chief forms of Cooperative Enterprise
The following are the main forms of cooperative enterprise:
Consumer cooperatives: these are enterprises owned by consumers and managed democratically which aim at fulfilling the needs and aspirations of their members (14). Producer cooperatives: these are organized for group buying and selling. Also, producer cooperatives are owned by producers of farm commodities or crafts that band together to process and market their products (15).
Corporate Combination: this is a form of private enterprise wherein two or more corporations under one management combine in order to gain more profits through the economies of large-scale enterprise. Most corporations combine in order to reduce costs, eliminate competition, control raw materials and semi-manufactured products, have experienced and talented employees, and other economic benefits (1).
Forms of Corporate Combinations
The following are the different forms of corporate combinations:
Merger: a form which a corporation acquires the assets of different corporations to achieve greater efficiencies of scale and productivity. They tend to either form new corporation or merge the assets in an existing organization (1). Basically, when two companies become one. This decision is usually mutual between both firms (12). Example: Banco de Oro Equitable PCI Bank Merger, Digitel Telecommunications Smart PLDT Merger, Nissan Renault Merger, Philip Morris Fortune Tobacco Merger in the Philippines.
Holding company: a corporate combination whose purpose is to own shares of other companies. Such form of corporation does not produce their own goods or services (1). A holding company must own at least 80% of voting stock to get tax consolidation benefits, such as tax- free dividends (13). Example: D. M. Consunji, Inc. (DMCI) Holdings, Inc., Metro Pacific Investments Corporation (MPIC), SM Prime Holdings (SMPC), Benpres Holdings Corporation, etc.
Types of Corporate Combinations
The following are the different types of corporate combination:
Horizontal combinations: It is an association of two or more business units of same nature under a single management. Both the business units involved in combination are engaged in same activity (16). Example: Banco de Oro (BDO)
Vertical combinations: Two companies join together to produce different goods or services from raw material to a specific finished product (17). Example: Lenovo, SMC Global Power Holdings (oil and fuel for power plants, generation and distribution of electricity)
Based on Divergent Functions:
A. Combination through joint product group: combination of companies with different products but manufacture of any one of the products might be stopped without affecting the other products (1). B. Combination through by product group: combination of companies with businesses that process same raw materials and manufacturing it to different products (1). C. Combination through like process: combination of different companies that work together to process operations to manufacture products (1).
Convergent Function: companies produce different products which are either complementary or auxiliary. Complementary products are different products combined to produce a single product. Here, the different products are manufactured together, sold together, bought together, or used together and combined into a single product. On the other hand, auxiliary products are goods needed only in the manufacture of the final product but does not add to the physical material of the finished goods (1).
Lateral or Conglomerate Diversification: a combination of two or more corporations engaged in entirely different businesses together into one corporate structure. It usually involves a parent company and many subsidiaries (18). Example: San Miguel Corporation (SMC), engaged in Banking, Food and Beverage, Mining, Property Development and Power Generation; Ayala Corporation, engaged in banking, property development, telecommunication and utilities; Filinvest Development Corporation, engaged in banking, property development and recently enter the power generation sector; etc. Advantage and Disadvantages of Cooperative Advantage: The formation of the business is easy: The formation of a cooperative society is very simple as compared to the formation of any other form of business organizations. Any ten adults can join together and form a cooperative society. The procedure involves in the registration of a cooperative society is very simple and easy. No legal formalities are required for the formation of cooperative society (10). Limited liability: In most cases, the liabilities of the members of the society is limited to the extent of capital contributed by them. Hence, they are relieved from the fear of attachment of their private property, in case of the society suffers financial losses (10). Disadvantage: There is some loss of independence and inefficient management: A cooperative society is managed by the members only. They do not possess any managerial and special skills. This is considered as major drawback of this sector. Inefficiency of management may not bring success to the societies. Disagreements between partners may occur: The management of the society constitutes the various types of personnel from different social, economic and academic background. Many a times they strongly differs from each other on many important issues. This becomes detrimental to the interest of the society. The different opinions and disputes may paralyses the effectiveness of the management.
Factors Affecting the Choice of Ownership Form The following are the different factors that affect the choice of ownership form: Promoters: they offer some ideas on the forms of organization. Business nature and size: The nature of business is one of the most important factor in choosing the ownership form of business. Businesses providing direct services like tailors, restaurants and professional services like doctors, lawyers are generally organized as proprietary concerns. While, businesses requiring pooling of skills and funds like accounting firms are better organized as partnerships. Manufacturing organizations of large size are more commonly set up as private and public companies. Moreover, if the business is small, a single proprietorship may be considered (19). Capital: The capital or funds required to build and establish a business plays an important part on the choice of ownership of an individual. If the investment is small, the individual might consider choosing sole proprietorship for his/her business. Operating time of the business: this refers to how long will the business last in the industry. An individual might consider the ease of establishing the business and its dissolution as well. Product type to be manufactured: an individual should consider what type of product he/she would sell to the public. Sales of their product would determine their profit in time. Productions Method and Volume: an individual should also consider how he/she would produce the product to be sold, and how much would they manufacture which will not lead to their loss. Markets to be supplied: an individual should consider the kind of markets to be supplied. He/she might consider having targets of people who would buy his/her product and where could those people be so that the individual would know where to market the product. Competitiveness: in building a business, one can consider having rivalries. It is best to build a business wherein you have no competitors. If thats the case, then you are the only provider of the good or service in that place. Laws and government: Favorable business policies will affect the choice of business ownership because entrepreneurs will consider benefits given by government which are advantageous to a certain type of ownership.
Summary and Conclusion A business or enterprise is an organization in which the basic resources such as materials and labor, are assembled and processed to provide goods or services to customers. The objective of most businesses is to maximize profits. These businesses can be owned privately, publicly or both. Private businesses are normally organized in one of the following forms: Individual or Sole Proprietorship, Partnership, Corporation, Cooperative Organization, and Corporate Combination. As for the public enterprises, they are normally organized as public corporation or non-incorporated public enterprise. Whatever form of ownership a business adapts, the economic performance and management of the business are vital concerns. In conclusion, ownership plays an important role in the management of businesses. Obtained knowledge about the form of ownership and the way businesses are organized are keys to successful management of an enterprise. With that, the conditions of production can largely be determined.
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