THC10 – ENTREPRENEURSHIP IN TOURISM AND HOSPITALITY
Chapter 5: Forms of Business Organization
At the end of this chapter, students should be able to:
1. Explain the characteristics of each business ownership and how well they match an
entrepreneur’s business idea
2. Describe the features of hospitality and tourism business forms
3. Differentiate the types of business structure, its advantages and disadvantages.
Introduction
Tourism is one of the world’s fastest growing industries that include accommodations,
transportations, entertainment, recreation, and food and beverage services as well. Tourism is also vital
for the success of many economies around the world. There are many benefits of tourism such as boosting
the revenue of the economy, creates jobs for the locals, develops the infrastructures of a country, cultural
exchanges, and improves relationships between nations and states. Tourism can generate revenues for
local economies when tourists spend money on hotels, restaurants, and entertainment.
The tourism and hospitality businesses operate under one of the four broad legal structures such
as sole proprietorship, partnership, corporation, and franchising. As we all know, there is no best form of
ownership because it all depends on the situation and financial status of the business owners. There are
many factors to consider in choosing the right form of ownership like tax consideration, liability, capital
requirements, control, managerial ability, business goals, and management succession plans. Some would
transfer to another area because of tax incentives or lower tax rates.
a. Sole Proprietorship
The sole proprietorship is a business owned and operated by one person only. The business
considered an extension of the owner and responsible for any debts or liabilities incurred by the
business. It is the simplest to operate from a tax and accounting perspective but not a legal entity. A
sole proprietor may use a trading name or business name other than its legal name.
Advantages of a Sole Proprietorship
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Simplest to set – up
Least costly form to begin with
Total decision – making authority
Profit incentive
No special legal restrictions
Disadvantages of a Sole Proprietorship
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Demanding on owner’s time
Growth is limited by the owner’s financial means
Unlimited personal liability
Lack of continuity for the business
Limited capabilities and skills
b. Partnership
Partnership is a union or association of two or more persons to manage a business to earn a
profit. Each of the partners willingly agrees to provide some amount of work, capital and sharing of
profits. The best partnerships are those who trust and respect each other.
Different Kinds of Partnership
1. General Partnership - a kind of partnership where the general partners are liable for the contracts
and obligations of the partnership pro-rata with their individual private or personal property after
exhaustion of partnership assets. A general partnership will never have a limited partner. Every
partner’s assets can be used to repay the liabilities of the partnership. This also means that each
partner is responsible for every other partner’s actions.
For example, Rose and Pearl are in general partnership. If Rose is sued for malpractice, Pearl’s
assets may also be claimed against in the lawsuit.
2. Limited partnership – a kind of partnership that is composed of one or more general partners and
one or more limited partners. The limited partner is only liable to the extent of the capital
contributed by him for the contracts and obligations of the partnership. A limited partnership
should always have one or more general partners. Its partnership name must contain the word
“Limited or Ltd.” As a limited partner, they are not involved in management decisions and do not
have any direct control over the company.
Real estate investors, for example, might use a limited partnership. Another common use of a
limited partnership is a family business, called a family limited partnership. Members of the family
may pool their money, designate a general partner, and watch their investments grow.
3. Partnership at will – partnership whose term of existence is indefinite it may be dissolved at will
by any partner at any time he/she pleases and at a moment’s notice.
4. General professional partnership – a general professional partnership is a partnership formed for
the existence of a profession, like law, accounting engineering and architecture.
Advantages of a Partnership
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Easy to set – up
Partners can complement their expertise and skills in the business
More financial resources are available for the business than a sole proprietorship
Partners share in the decision – making of the enterprise
The business is not subject to as many government regulations as companies in corporations
Disadvantages of a Partnership
1. Unlimited liability of at least one partner
2. There is a possibility of conflicts and disagreements between partners
3. There is a divided authority and profits among partners in the business
4. The partnership firm suffers from uncertain existence because it can be dissolved if one of
the partners died
Partnership’s Registration Requirement
Partnerships are required to be registered with the Securities and Exchange Commission (SEC) in
the Philippines to be able to start their business.
According to the Philippine Civil Code, partnership is:
“Article 1767. By the contract of partnership two or more people bind themselves to contribute
money or industry to a common fund, intending to divide the profits themselves.”
The Articles of Partnership is an instrument in writing by which the parties enter into a contract or
agreement of partnership. The principal parts of the Articles of Partnership are as follows:
a. Partnership name under which the company shall transact business
b. Names, nationalities, and residences of the partners. If it is limited partnership, the kind of partner
is whether general or limited
c. Principal office of the partnership
d. Duration or term of existence of the partnership
e. Capital of the partnership
f. Transfer clause
g. Undertaking to change partnership name
h. Other provisions, conditions, terms, and stipulations
i. Signatures of the partners
j. Notarial page
c. Corporation
A corporation is a legal entity that is separated and distinct from its owner. A juridical person is
created by operation of law and registered with SED. It can enter into contracts, bank loans, hire
employees, pay taxes, etc. The ownership of a corporation is divided into shares of stock. A corporation
issues the stock to individuals or other businesses, who then become owners or stockholders of the
corporation.
Republic Act 11232, or the act providing for the Revised Corporation Code of the Philippines, was signed
into law by President Rodrigo R. Duterte in February. The law introduces fresh and progressive concepts
aimed at improving the ease of doing business in the country, promoting good corporate governance, and
provide protection to corporations, investors, and consumers alike, amid a fast evolving business
landscape.
Advantages of a Corporation
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Limited liability of owners or stockholders
Attracts capitalization
Ability to continue indefinitely
Transferable ownership
Increased ability and expertise
Management or decision-making is shard by the board of directors, not the sole individual
Disadvantages of a Corporation
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Cost and time involved in the incorporation process (organizing expenses)
Double taxation/higher tax rates
Mandated by governmental requirements and law
Potential loss of control by founders
Lack of representation
Articles of Incorporation – is a document that is needed to form a corporation in the Philippines and must
be registered with SEC.
The contents of the Articles of Incorporations are the following:
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The name of the corporation
The specific purpose or purposes for which the corporation is being incorporated
The place where the principal office of the is to be located , which must be within the Philippines
The term of which the corporation is to exist
The names, nationalities, and residences of the incorporators
The number of directors or trustees, which shall not be less than five (5) nor more than fifteen
(15)
7. The names, nationalities, and residences of persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and qualified
8. It it is a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares into which is divided, and in case the share is par value shares,
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 some or all the shares are without
par value, such fact must be stated.
9. It it is a non-stock corporation, the amount of its capital, the names, the nationalities of the
contributors, and the amount contributed by each
10. The name of the treasurer-in-trust
11. Transfer clause
12. Other matters that are not inconsistent with law and which the incorporators may deem
necessary and convenient
Example of Corporation
JG Summit is created by Mr. John L. Gokongwei. He first opened a cornstarch plant which is called
Universal Corn Products, Inc. in Pasig. Since then, JG Summit widened its enterprises and diversified into
other products and services, which include the FOLOWING:
➢ Universal Robina Corporation is one of the largest growing snack-food and beverage companies
in the ASEAN region that is serving quality products affordable process.
➢ Cebu Pacific Air is the Philippines’ first budget airline and one of the largest domestic airline
carriers with a growing international network reaching Asia, Australia, and the Middle East.
➢ Robinsons Land Corporation is one of the leading property developers that offers a network of
modern commercial centers, office buildings, hotels, residential condominiums, and housing
projects.
➢ JG Summit Petrochemicals is the country’s first petrochemical manufacturing operation serving
the requirements of the local manufacturing sector.
➢ Robinsons Bank is one of the leading commercial banks and serving the growing number of
suppliers, tenants, distributors, business partners, and employees of the entire JG Summit and
Robinsons Retail Group.
➢ JG Summit also has significant minority positions in the Philippines’s largest telecoms companyPhilippine Long Distance Telephone Co. (PLDT), the Philippines largest electricity distributorManila Electric Company (Meralco), and one of the Philippines’ leading power producers-Global
Business Power Corporation (GBP).
d. Franchising
Franchising is another form o business that exists in the tourism and hospitality sector. Franchising
enables a business to grow quickly into several geographic markets at once with a proven and tested
strategy. The franchiser sells to the franchise the right to do business under a particular name, the
right to a product, process service, training, and assistance in setting up that business. The company
also provides ongoing marketing and quality control and guidance once the business is established.
Under a franchising agreement, the franchise agrees to pay the franchiser a royalty or commission
apart from a flat fee, in exchange for the use of a national or international brand name.
To differentiate:
➢ A franchisor (entrepreneur/developer) is the owner of the business that provides the product
or service.
➢ The franchisee (businessperson) is the one who receives the rights to use the franchisor’s
business name.
Product franchises – the most popular type of franchise is the one that offers a product, a brand name,
and an operating model.
Benefits of Franchising
The following are benefits of franchising:
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Proven business system and procedures
Management training and support
Benefits from the strong brand name
Standardized quality of goods and services
National advertising programs (promotions)
Financial assistance
Proven product and tried recipes
The franchise can benefit from economies of scale (e.g., site selection and territorial protection)
Franchise systems are often favored by banks due to an established track record.
Drawbacks of Franchising
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Franchise fees and ongoing royalties
Strict adherence to standardized operating procedures
Restriction on purchasing (approved suppliers only)
Innovation may be limited because the franchise operates to a strict formula of production, sales
and marketing.
The steps to consider in buying a franchise are:
a.
b.
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d.
e.
f.
g.
Evaluate yourself and trust your instinct.
Research your market and the franchise company.
Consider your franchise options, financial capabilities, and legalities.
Get a copy of the franchiser’s FDD.
Talk to existing franchisees. Review their comments and experiences with the company.
Ask the franchiser some tough questions like the profitability side of the business
Make your choice.
Franchising Rules and Regulations
Many countries have laws that regulate commercial franchising such as the United States. In the
country, franchising is governed by general laws of the land (Philippines) depending on the issues at hand.
For example, provisions of the franchising contract are governed by the applicable sections of the Civil
Code while the Intellectual Property Office if it implies with the mandatory provisions and does not
contain any of the prohibited clauses. For a lot of Filipinos, having their own business is their ultimate
dream and to make it a reality with lesser risk is through franchising.
It is reliable to invest in a popular franchise company, but it does not mean you will not trust the company
with unfamiliar products or brands. You can check the company if it is properly licensed and registered in
appropriate government offices like the Department of Trade and Industry (DTI) and SEC. It also helps to
check if they are part of reputable franchise groups like Association of Filipino Franchisers, Inc. (AFFI),
Philippine Franchise Association (PFI), and Filipino International Franchise Association (FIFA).
Example of a Franchise
Mang Inasal is one of the leading restaurants in the country that sells chicken inasal. It is one of
the strategic business units of Jollibee Foods Corporation (JFC). Mang Inasal has been able to leverage
the existing system of JFC that ensures high-quality food and good customer service. The foundation
comes from the resources and success factors of JFC’s business units. Mang Inasal is very successful in
penetrating across strategic locations in the Philippine Market.
Mang Inasal has over 500 stores in the Philippines and 90% are franchised. The DTI and PFA award Mang
Inasal as a Hall of Fame Awardee as Outstanding Filipino Franchising in the Food and Large-Scale Category.
The term for franchising Mang Inasal is ten years and renewable and subject to the franchisee’s
performance.
Business Acquisition in Tourism and Hospitality
1. Buying an Existing Tourism and Hospitality Business
A prospective owner must ask several key questions before buying an existing business:
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It is the right of business for the market?
What experience do I bring to the venture?
What is the success potential?
What changes are needed and how extensive are they to realize the full potential of the value of
the business?
Advantages of buying an existing business include:
➢ A successful existing business may continue to be successful because of its proven strategy and
system.
➢ An existing business has known the best location for the business.
➢ Employees and suppliers are established already and can pass the skills or procedures to the
newcomer.
➢ Equipment is installed, used and productive capacity is known.
➢ Inventory is in place and trade credit is established. It is experienced on the supplier capabilities.
➢ The new business owner can use the experience of the previous owner.
➢ Easier financing.
Advantages of buying an existing business include the following factors:
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The previous owner may have created ill will.
The business location may have become unsatisfactory.
Equipment and facilities may be obsolete or inefficient.
Change and innovation are difficult to implement.
Inventory may be outdated or obsolete
Accounts receivable and payables may be worth less than face value.
Changes may be difficult to implement.
Inventory may be stale or old stock.
The business may be overpriced and with lesser profit.
Part III: DEVELOPING A BUSINESS PLAN
CHAPTER 6: Crafting a Business Plan
At the end of this chapter, students should be able to:
1. Explain the importance of a business plan to Describe the importance of a business plan to an
entrepreneur;
2. Explain the elements in preparing a business plan;
3. Explain the benefits of preparing a business plan;
Introduction
Planning is very important to the success of any business and serves as a guide through
uncertainty. One must address the plans to have realistic goals, flexibility, a market niche or segment,
commitment and continuous evaluation of progress. A business plan is a written document that gives the
details of the proposed business venture. A selling document conveys the excitement and potential of
your business to any investor or stakeholders. It describes a clear picture a clear of what the venture is,
where it is projected to go, and introduces the strategy and operations of the proposed venture. A
business plan also covers marketing, research and development, manufacturing, management, critical
risks, financing and timetable.
Value of Developing a Business Plan
The business plan serves as a road map for lucrative business in the future. It specifies the
direction the business is taking, its goals and objectives, where it wants to be , and how it plans to get
there. The plan serves as a written roof and assurance that the entrepreneur has performed the necessary
research and studied well the business plan.
Two Essential Functions of Business Plan:
1. It provides an operational guide – plan provides tools for the business such as mission statement,
goals, objectives, budgets, financial forecast, target market, and the strategies to help in the
development of the business. It gives the management, as well as the staff, a sense of direction.
It also gives everyone a target to achieve. By using those targets or projections, the management
can measure their actual performances versus the target they wanted to achieve.
2. To attract potential investors or lenders to finance the business venture – applying for loans from
investors or banks without a solid business plan might not be given the needed financing for the
business venture. An entrepreneur must focus on the details and explain well the sustainability of
the business. A business plan should prove that the venture can pay off the loans in the future as
well as to have an attractive profit for the investors.
A good business plan should address the following:
a. Who is the primary customer? What are the characteristics and demographic profiles of this customer
base?
b. Where do they live, work and shop?
c. Why choose this customer base and how large it is? One must need to know that there is sizeable
potential market for the products or services.
d. Why do they buy? What needs and wants of the target market drive their purchasing decision?
e. What can my business do meet those needs and wants better than the competitors?
f. Knowing my customer’s needs and wants, what should be the basis for differentiating my business in
their minds?
COMPONENTS OF A BUSINESS PLAN
Section I: Executive Summary
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It should be clear, informative, and compelling so that people will be interested in the business.
It is a synopsis of the entire plan in a capsulized form which explains the basis business model
and briefly describes the owner, key employees, target market, and financial data.
A brief persuasive well-developed summary that includes a financial proposal. It should not
exceed two pages.
The most important section of the business plan.
Section II: Company Description
The main body of the business plan should have a general description of the company.
Items included in this section are:
a. Company description – the entrepreneur knows how to translate an idea into a business and
describe the company itself. The purpose and reason for the business venture should also be
discussed.
b. Company history – the owner should prepare a brief history of the company and highlights its
significant events. It describes how the company was formed and what will it be in the future.
c. Mission statement – it is the entrepreneur’s vision of what the company is and what he wants to
accomplish with the business in the future. It serves as the thesis statement for the entire business
plan.
d. Products and services – this part describes all the products and services offered by the company.
e. Legal status and ownership – this part describes the business type and who owns the business
ideas.
Section III: Industry Analysis
This section familiarizes the investors in the industry in which the business will compete. It will
also describe the industry in terms of its market size, growth rate, and sales projection including where
its promising areas are and where its points of vulnerability are.
Items included in this sections are:
a.
b.
c.
d.
e.
f.
Industry size, growth rate sales projection
Industry structure
Nature of participants
Key success factors
Industry trends
Long – term prospects
Section IV-A: Market Analysis
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Entrepreneurs must prove that there is a real market for the proposed products or services
The market analysis breaks the industry into segments to which the firm will try to appeal.
He should describe company’s target market and the characteristic of that market
One of the characteristics of good business is the ability to attract real customers who are willing
to buy the products or get the services of the business venture.
A good market analysis should identify the following:
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b.
c.
d.
e.
f.
g.
Target market – identify the promising customers or prospects and give their characteristics and
location.
Advertising – after identifying the company’s target market, design a promotional campaign to
reach those customers effectively.
Market size and trends – how large is the potential market?
Location – choosing the right location will give a better chance of success.
Pricing – how much does the product or service cost to produce and deliver to customers? What
is the company’s over all pricing strategy?
Distribution – how will the product or services be distributed? What can the company do to make
it easier for the customer to purchase products or services? It must describe the channels of
distribution that the business will use.
Competitor analysis – the entrepreneur should discuss the competitors of the buisness venture.
He should study the competitor’s market shares, products, and strategies to compare it with bhis
products or services.
Items included in this section are:
a. Market segmentation and target market selection
b. Buyer behavior competitor analysis
Section IV-B: Marketing Plan
The marketing plan focuses on how the business will market and sell its product or services.
Items included in this section are:
a. Overall marketing strategy
b. Product, price, promotion, and distribution
Section V: Management Team and Company Structures
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It is a challenge for every entrepreneur to hire and attract the right people for the company.
The quality of your people will determine the success of the business.
Indicate who is in your team, their qualifications, and their responsibilities. Describe the company
structure.
The plan should describe the qualifications and work descriptions of the business officers and key
employees. An investor will check on the qualifications of the people who will implement the
business plan.
To complete the description of the business, the owner should construct the organizational chart
and identify the key positions and the person occupying them.
Items included in this section:
a. Management team (key personnel)
b. Board of directors
c. Board of advisers
d. Company structure
Section VI: Operations Plan
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Outlines how your business will run and how your product or service will be produced.
Illustrate how the business runs from the front stage (seen by customer) to the backstage
(unseen by the customers).
How will you keep track of inventory?
How will you keep costs reasonable to remain competitive?
Items included in this section are:
a. The general approach to operation
b. Business location
c. Facilities and equipment
Section VII: Product Design and Development Plan
If developing a completely new product or service, you need to include a section that focuses on
the status of your development effort.
Items included in this section:
a. Development status and tasks
b. Challenges and risks
c. Intellectual property
Section VIII: Financial Projections
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The final section of a business plan presents a firm’s pro forma or projected financial projections.
Demonstrate the potential growth and profitability of the business.
The most important section of the business plan is an outline of the proposed company’s financial
statements.
When making financial projections, it is important to explain any assumptions – how you
determined the figures you used.
If you are looking for financial assistance, lenders will want to know where you will get financing
for your business and how you will spend the money.
Ideally, these statements should be audited by a certified public accountant because most
financial institutions prefer that extra reliability.
In an existing business, the entrepreneurs must use past financial statements to know the status
of the company.
Items included in this sections:
a. Sources and uses of funds statement
b. Assumption sheets
c. Pro forma income statements
d. Pro forma balance sheets
e. Pro forma cash flows
f. Ratio analysis
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The loan or investment proposal section of the business plan states the purpose of the financing,
the amount requested, and the plans for the repayment or in the case of the investors, an
attractive exit strategy.
When describing the purpose of the loan or investment, an entrepreneur must specify the
planned use of the funds such as for the modernization of the production area.
Another important element of the loan or investment is the repayment schedule for the loans.
Financial projections must reflect the firm’s ability to repay loans and produce attractive profits.
The owner should have timetable for implanting the proposed plan.
Presenting the business plan to investors:
1. Investors and lenders must be impressed by having a well – prepared and informative business
plan.
2. Know your audience thoroughly ahead of time. Build a good rapport with the investor or lenders
as this will be highly needed during the follow – ups for the implementation.
3. The smart entrepreneur must have a good idea of the questions that will be asked and must
prepare for those questions. It is important to rehearse for the presentation.
4. Demonstrate enthusiasm about the business ventures.
5. Use visual aids for a clearer picture of the presentation.
6. Simplify your presentation by limiting two to three major points of the business plan and avoid
technical terms that might be difficult to understand by the investors.
Benefits of a Business Plan
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Reality test – the reality test’s external components revolve around proving that the market for
the product and service exists. The entrepreneur must prove that there is a strong demand for
their business venture’s product and services. It focuses on the attractive industry, market niche,
potential customers, market size, and other similar factors. The internal component of the realty
test focuses on the features of the product or service itself. Can the company produce it for the
cost estimate? Is it uniquely different from the competitor’s offerings?
Competitive test – the competitive test external component assesses the business’s relatives
position to its key competitor? What is the company’s strengths and weaknesses as compared to
the competitors? How will the competitor react to the new entrants in the market? While the
internal competitive tests focus on the management’s ability to create a company that will gain
an edge over the competitor, a business plan must prove the quality of their products or the skills
of the management team and team members are better than the rest in the industry.
Value test – the entrepreneurs must convince the investors and lenders that they can pay off the
loan and give an attractive return on investments and that it will give appealing profitability for
them. The real value in preparing a business plan is in the process of making a business plan since
the ideas were subjected to objective and critical evaluation. What the entrepreneur learns about
his company like the target market, financial requirements, marketing strategy, operations, and
other related factors is needed to make the venture prosper. It is cheaper to make mistakes in
the business plan rather than in the actual business implementation. A business plan can reduce
the risks and uncertainty in the implementation of the plan.