FINANCIAL MANAGEMENT Chapter 2: Organizing a Business

Reporters: Apodaca, Donna Lyn Manguino, Kriza Rae E. Medenilla, Matt Ezekiel D. Solis, Shiela Marie M. Valeros, Reolyn

Organizing a Business ENTREPRENEURSHIP The term Entrepreneurship refers to an individual s undertaking whereby he invests his money in a business which he manages. For an individual desirous of starting a business of his own, the following are some of the questions that may guide him in his choice of activity. -What goods and services are needed in the community? -How can I make these goods and services available? -What sources of materials are available in the community that I can make use of in making the goods and services available? -What kind of labor do I need to make the goods and services available? Is the supply of required labor sufficient? -What financial resources do I have that I can make use of in this business? -Am I willing to take risks? What are the risks involve? -Am I willing to make sacrifices for the growth and stability of the business? Am I willing to work longer hours? -What governmental regulations must be observed in this kind of business? -Where should my business be located? -How much capital do I need to make the business viable? -How much is the capital must be in working capital, plant, property and equipment? -Are there competitors in the kid of business I have in mind? If so, what is their share of the market? How can I improve on my competitors practices? -In case I need additional capital, what are my possible sources and the costs involved? -How long would it take to recover my investment? -What would be the rates of return on sales, on total assets, and on owner s equity? PROMOTION The term Promotion refers to the activities involved in making a business ready to operate. Individuals who undertake the activities in organizing a business until it becomes operational are called Promoters. DISCOVERY Refers to finding business opportunity and conducting investigation to determine whether it should be undertaken or not. In other words, it refers to looking for business prospects and making a study

as to whether it would be worthwhile going into. The study so conducted is generally called a Feasibility study. FINANCING This stage of promotion refers to procurement of the initial capital that the proposed business requires to be able to operate profitably. ASSEMBLING This stage is where all the factors required for viable business operations are made available in their optimum combination. In other words, it is where actual organization takes place. PROJECT FEASIBILITY STUDIES Is a thorough and systematic analysis of all factors to ascertain the viability of an undertaking. It gives a capsule view of the whole project by presenting its highlights, descriptive definition, longrange objectives, feasibility criteria, history and basic assumptions. It contains the name of the firm location and size of its head office, plant site comprehensive description of the business and its operations, and the projects lines. MAJOR PARTS OF THE FEASIBILITY REPORT Marketing 5. Legal Organizing and management 6. Financing Technical 7. Financial Taxation 8. Social and economic benefits

1. 2. 3. 4.

FINANCIAL ASPECTSOF PROJECT FEASIBILITY STUDIES; FINANCIAL MANAGERS ROLE THEREIN Finance managers are primarily involved in the financial aspects of a project feasibility study. The financial aspects should include the ff. A. Statement of major assumptions B. Projected financial statements and supporting computations C. Analysis of financial statements. The projected financial statements may be in the form of; A. Projected income statement B. Projected statement of financial position C. Projected statement of cash flows

FORMS OF BUSINESS ORGANIZATIONS y y Sole Proprietorship a form of organization where there is only one owner, the proprietor. Partnership an association of two or more persons who bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing profits among themselves. Corporation 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.

Sole Proprietorship Organizing a Sole Proprietorship y y y y Register the business name with the Department of Trade and Industry. Pay the municipal licenses to the local government. Apply for VAT or non-Vat number Register with BIR the books of accounts & the business forms to be used. Advantages & Disadvantages of a Sole Proprietorship Advantages 1. It is easy to organize. 2. Decisions can easily be made in as much as they are made by the owner himself. 3. Financial operations are not complicated in as much as this type of organization is generally for smallscale business. 4. The owner is entitled to all the profits his business realizes. Partnership Partnerships are governed by the provisions of the Civil Code, articles 1767 to 1867. Organization of Partnerships A partnership is formed when an individual invites another to join him in business and divide profits between themselves. Disadvantages 1. Limited ability to raise capital. 2. The sole proprietorship has unlimited liability. 3. Limited ability to expand. 4. Business is entirely a responsibility of the owner. 5. Net income is subject to tax regardless of whether it is withdrawn or not.

As a general rule, no special form is required for the validity or existence of the partnership contract so that it may be made orally or in writing regardless of the value of the contribution. When an immovable property or real rights are contributed, the contract must be in a public instrument. Provisions of the Civil Code on Partnership Formation Article 1771: A partnership may be constituted in any form except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. Article 1772: Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the office of the Securities and Exchange Commission. Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third parties. Although the Civil Code requires that every partnership contract with capital of 3,000 or more to be in a public instrument and registered with the SEC, failure to comply with said requirement does not affect its validity. However the registration with the SEC is a requirement for the issuance of licenses by the municipal or city government. The following is the procedure followed in organizing a partnership: y y y y y y y Register the business name with the Department of Trade and Industry. Have the partnership agreement (articles of co-partnership) notarized. Obtain a tax account number for the partnership from the BIR. Have the partnership agreement (articles of co-partnership) notarized and then registered with the SEC. Obtain the municipal licenses from the local government. Obtain the value added tax account number (VAT) or the NON-VAT, as the case may be. Register books of accounts (journals and general ledger) and business forms to be used (sales invoice, official receipts, cash sales invoices, etc.) with the BIR.

Partnership Contract The contract between the partners is called the articles of co-partnership. It contains, among other items, the following: 1. 2. 3. 4. 5. Name of the partnership Names of the partners Place of business Effective date of the partnership Nature of business 6. Investment of each partner and corresponding capital credit 7. Duration of the contract 8. Rights, powers, and duties of the partners

9. Accounting period 10. Manner of dividing profits and losses 11. Liabilities of the partners for partnership debts 12. Compensation for services offered by partners Classification of Partnerships

13. Treatment of partners additional investments and withdrawals 14. Procedures for settlement for partner s interest upon dissolution of partnership 15. Provision for settlement of dispute.

Based on object or scope of subject matter: a. Universal partnership. This may refer to the contribution by partner of all present property or of all profits. Universal partnership of all present property. This may refer to all the properties that actually belong to each of the partners at the time the partnership is formed, with the intention of dividing the same among themselves as well as the profits that they may acquire therewith. Universal partnership of all profits. This refer to all the profits that the partners may acquire by their industry or work during the existence of the partnership. b. Particular partnership. Its objects are determine things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. Based on liability of partners for partnership obligations: a. General partnership. All partners are general partners. b. Limited partnership. Partnership having one or more general partners and one or more limited partners.

Classes of Partners Based on their contribution: a. Capitalist partner. A partner who contributes money or property to the capital of the partnership. b. Industrial partner. A partner who contributes his work, labor or industry to the partnership. c. Capitalist-industrial partner. One who contributes money or property as well as his work or industry to the capital of the partnership. Based on their liability for partnership debts: a. General partner. Partner liable for partnership debts to the extent of their personal property after all the partnership assets have been exhausted. b. Limited partner. Partner who are liable for partnership debts only to the extent of their capital contributions.

Partnership as a Juridical Person Per article 1768 of the Civil Code, the partnership has a juridical personality separate and distinct from that of each of the partners even if the contract between the partners is not in a public instrument and is not registered with the SEC. As such, the partnership can acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions in conformity with laws. Responsibilities of Partners Article 1786 of the Civil Code states: Every partner is debtor of the partnership for whatever he may have promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered without the need of any demand. Manner of dividing profits and losses Partnership profits and losses are divided based on the agreement between themselves. In the absence of stipulation in the partnership contract, the same shall be divided based on their capital contributions. Liability of Incoming partner for Existing Obligations An incoming partner has limited liability for all obligations existing at the time of his admission to a partnership. Organizational Setup in a partnership A partnership usually has a managing partner appointed in the articles of the partnership. In case partners fail to designate who among them shall act as manager, all of them shall be considered as agents of the partnership. Corporations A corporation is an artificial being created by operation of law having the right of succesion and the powers, attributes and properties expressly authorized by law or incident to its existence. The right of Succession

A corporation has the right to continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of the individual members or stockholders and regardless of the transfer of their interest or shares of stock. Its life is limited to the term stated in the articles of incorporation but it should not exceed 50 years, subject to extension for a period not longer than 50 years in any one instance. Classifications of Corporations 1. Based on nature of its capital a. Stock Corporation with stocks b. Non-stock Corporation for charity, religious, educational, etc. 2. Based on whether they are public or private purpose a. Public corporation it is formed or organized for the government of a portion of the State. b. Private corporation for private purpose or benefit. 3. As to their relation to another corporation a. Parent corporation owns controlling interest in another corporation (more than 50%) b. Subsidiary corporation it is the investee corporation in which the parent corporation has controlling interest 4. As to the state or country under or by whose laws they have been created: a. Domestic corporation created under Philippine laws. b. Foreign corporation it is one formed, organized or existing under laws of other countries. 5. As to whether they are open to the public a. Close corporation limited to selected persons or members of a family. b. Open corporation it is one which is open who may wish to become a stockholder or member thereof. Contents of the Articles of Incorporation 1. Name of the corporation. 2. The specific purpose for which the corporation is being incorporated. Where there is more than one stated purpose, the articles of incorporation shall state which is the primary purpose and the secondary. 3. The place where the principal office of the corporation is to be located, which must be within the Philippines. 4. The term for which the corporation is to exist. 5. The names, nationalities, and residences of the incorporators. 6. The number of directors or trustees, which shall not be less than 5 nor more than 15. 7. The names, nationalities, and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this

Code. 8. If it be stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the shares are par value, the par value of each, The names, nationalities, and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if without par value, such fact must be stated. 9. If it be a non-stock, the amount of its capital, The names, nationalities, and residences of the contributors and the contribution of each. 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. By-laws 1. The time, place and manner of calling and conducting regular or special meetings of directors or trustees. 2. The time, place and manner of calling and conducting regular or special meetings of stockholders or members. 3. The required quorum in meetings of stockholders or members and the manner of voting therein. 4. The form of proxies of stockholders or members and the manner of voting therein. 5. The qualifications, duties and compensation of directors or trustees and officers. 6. The time for holding the annual election of directors or trustees and the manner of giving notice thereof. 7. The manner of election or appointment and the term of office of all officers other than of directors or trustees. 8. In Stock Corporation, the manner of issuing certificates. 9. The penalties for violation of the by-laws. 10. Other matters that may be necessary for the proper and convenient transaction of its corporate business and affairs. Right of Stockholders 1. Right to attend and vote in person or by proxy at stockholders meetings. 2. Right to receive dividends when declared. 3. Right to inspect corporate books and records and to receive financial report of the corporations operations. 4. Pre-emptive right. 5. Right to elect and remove directors. 6. Right to approve certain corporate acts. 7. Right to issuance of stock certificate or other evidence of ownership. 8. Right to transfer of stock on the corporate books. 9. Right to participate in the distribution of corporate assets upon dissolution. 10. Right to adopt, amend or repeal the by-laws or adopt new by-laws. 11. Right to compel the meeting of stockholders when for any cause there is no person authorized to call a meeting. 12. Right to enter into a voting trust agreement. 13. Right to recover stock unlawfully sold for delinquency.

14. Right to bring individual and representative or derivative suits. 15. Right to demand payment of the value of his shares and withdraw from the corporation in certain cases. 16. Right to have the corporation voluntarily dissolved. Pre-emptive Right of Stockholders Right to subscribe to all issues or disposition of shares of any class, in proportion to his shareholdings subject to certain exception. Watered Stock Stocks issued for a consideration less than par or issued value. Voting in a Stock Corporation A stockholder is entitled to cast votes equal to the number of shares he owns multiplied by the number of directors or trustees to be elected. Number of Shares to Ensure Election to the Board of Directors Total no. of shares Outstanding x Desired no. of seats +1 Total no. of Directors to be elected + 1 Number of seats No. of shares held 1 x no. of directors to be elected + 1 Total no. of shares outstanding Voting in a Non-stock Corporation Every member may cast as many votes as there are trustees to be elected but may not cast more than 1 vote for 1 candidate unless cumulative voting is authorized in the articles of the incorporation. Components of a Corporation 1. Corporators all the persons composing a corporation 2. Incorporators corporators mentioned in the articles of incorporation as originally forming the corporation and who executed and signed the articles of incorporation as such. 3. Stockholders any natural or juridical person owning atleast one share of a corporation. 4. Member corporators in a non-stock corporation 5. Board of Directors/Trustees governing body in a corporation Classes of Shares of Stocks 1. Common Stocks and Preferred Stocks 2. Class A and Class B Shares 3. Par Value and No- Par Value Shares 4. Founder s Shares Distinction between a Corporation and a Partnership

a. b. c. d.

Governing Laws Manner of Creation Number of Incorporators Commencement of Juridical Personality e. Power f. Management Similarities between a Corporation and a Partnership

g. h. i. j. k. l. m.

Rights of Succession Term of Existence Firm Name Transferability of Interest Extent of Liabilities to Third Parties Effects of Mismanagement Dissolution

a. Each of them has Juridical Personality separate and distinct from those of the individual composing it. b. They can be organized only where there is a law authorizing their organization. c. They can act only through agents. d. They are composed of a aggregate of individuals. e. They distribute their profit to those who contribute capital. f. Both of them where subject to corporate tax. Classification of dividends; effects of Corporate Account 1. Cash dividends- in form of cash; decrease in retained earnings and increase in current liabilities. 2. Property dividends- in form of property or other assets; decrease retained earnings and decrease assets. 3. Stock dividends-in form of stocks; decrease on retained earnings and increase in capital account. Advantages and disadvantages of Corporation Advantages: 1. It has a legal capacity to act as a legal unit. 2. It has continuity of existence. 3. Management is centralized in the board of directors or trustees. 4. The creation, organization, management, and dissolution process are standardized because they governed with only one incorporation law. 5. Shareholders have limited liability. 6. Shareholders are not general agents of the corporation. 7. Shareholders can transfer their shareholding without the consents of other shareholders. 8. It has ability to raise more funds. 9. Its ability to raise more capital makes feasible gigantic financial ventures. 4. Scrip dividends- in form of promissory notes; decrease retained earnings and increase in liabilities or capital account. 5. Bond dividends- in form of bond; decrease retained earnings and increase current liabilities. 6. Liquidating dividends- return of capital; decrease in capital account and premium and decrease in assets.

10. Stockholders are only taxed on their shares of distributed earnings. Disadvantages: 1. Subject to greater degree of governmental control and supervision. 2. Its cost of formation and operation is relatively high. 3. Its formation and management are relatively complicated. 4. It is subject to higher income tax rate. (30%) 5. It has a limited power. 6. Possibility of the board of directors to abuse their powers.