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Make the Right Choices for Your Business Structure

Make the Right Choices for Your Business Structure

In starting a business in the Philippines, one of the most common mistakes you can make is not thinking your business structure through. Many fledgling companies or entrepreneurs think the best thing to do is set up their business in the fastest way possible and deal with any complications down the road.
 
Not putting enough thought into your business’s structure can not only lead to more headaches but also lost opportunities. Before registering your company, take the time to understand how various options work and the pros and cons of each one.
 
Here’s a quick look at the different business structures in the Philippines.

 

Single or Sole Proprietorship

 
As the name implies, a single proprietorship is owned by one individual who also has sole control and responsibility over the business’s assets and liabilities. Any profit the business makes goes entirely to the owner.
 
A single proprietorship is registered with the Department of Trade and Industry. Only Filipinos can own this type of business.
 
Tax-wise, a single proprietorship is considered a pass-through entity. This means taxes for the income your business makes are passed on to your personal income tax. You don’t need to file a separate income tax declaration for your business.
 
Advantages:

  • You have full control over your business and don’t need to get the approval of partners or other stakeholders in making important decisions.
  • You have plenty of flexibility. If you register the business as a general sole proprietorship, you can change the services or products you offer without having to go through another round of application for permits and registration.
  • Registration for a single proprietorship requires lower fees and less paperwork

 
Disadvantages:

  • It does not shield your personal assets from the business’s liabilities. If your company runs into financial problems, creditors can go after your personal assets, such as your car or your house, in order to get paid.
  • You get limited sources of capital. It may be difficult to attract investors as they will not be considered owners of the business.
  • Depending on the profitability of your business, your personal tax burden could be greater

 

Partnership

 
A partnership in the Philippines should be formed by two or more persons, and can be a general partnership (GP) or a limited partnership (LP). Foreigners can own part of the business, as long as the Filipino component of the ownership is 60% or more. A partnership with a paid up capital of at least P3,000 should be registered with the SEC.
 
In a general partnership, all partners are equally liable for the debts and obligations of the business. In a limited partnership, only one or more partners have unlimited liability. The other partners’ liability is limited based on the amount of capital they contributed.
 
Profits are typically distributed according to the amount of capital each partner infuses. However, the partners may decide on other arrangements. Decisions about the company are often made as a consensus among the partners, but again, individual companies may adopt their own practices.
 
Taxation in partnerships is a bit complicated. Ordinarily, a partnership is taxed as a separate entity from the individual partners, and is subject to the same taxes levied on corporations. However, general professional partnerships (GPP), or partnerships formed by individuals to exercise their common profession, such as law firms, are taxed differently. A GPP is considered a pass through entity. It’s not taxed as a business, but individual partners have to declare the income they make from the partnership and pay the corresponding income tax.
 
Advantages:

  • A partnership allows you start a company even with a small capital
  • By pooling your resources, you and your partners can raise the right funding for the business
  • You don’t have the sole burden of running the business or making decisions about it, unless you have been designated to be the sole decision maker or manager

 
Disadvantages:

  • As with a single proprietorship, a partnership does not shield the owners from personal liability
  • Differences in opinions among partners can lead to conflicts. Moreover, unless smoothened out from the start, disputes on the distribution of profits may arise
  • Unless the company is a GPP, you are taxed twice. First, the partnership has to pay taxes as a business entity, then your individual income from the partnership is taxed as part of your personal income tax.

 

Corporation

 
A corporation is considered a separate entity from its investors or shareholders. It’s registered with the SEC with at least five persons as investors and a minimum of P5,000 as paid up capital. More shareholders may be added if the corporation decides to sell shares of stocks to raise additional capital.
 
Foreigners may invest in a Filipino corporation as long as their ownership is limited to 40%. If foreign ownership exceeds 40%, the company is considered a foreign-owned domestic corporation and is subject to a specific set of rules.
 
A corporation may be stock or non-stock. Shareholders from a stock corporation are entitled to dividends from the company’s profits. A non-stock corporation is primarily non-profit and does not issue shares of stocks to its incorporators.
 
Corporations are taxed similar to partnerships. They’re taxed according to the income they make, and individual shareholders pay personal taxes on the income they derive from the corporation.
 
Advantages:

  • As a separate entity, a corporation shields its shareholders’ personal assets from the company’s debts and obligations. Your liability as a shareholder is limited according the number of shares you have in the company.
  • It’s easier to raise a larger capital by issuing shares to more investors
  • There’s a clearer delineation of tasks and responsibilities between the investors and the managers

 
Disadvantages:

  • More paperwork, higher initial capital, and higher processing fees are required to register a corporation
  • Depending on the number of shares you own, your ability to influence business decisions may be highly limited
  • As with partnerships, you’re taxed twice – first, on the income the corporation makes, and second, on the income you personally make from the corporation

 
The right structure for your business depends on many things, including your goals, the nature of your products or services, and your management style preference. While you must consider all these, you also need to have a proactive approach and think about how your business structure can affect your operations in the long run.
 
For expert guidance, feel free to get in touch with our team.