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.