You started a business. It is growing. What should you do?
Most businesses start off as sole proprietorships, being the simplest form of business organization. It is also the most straightforward business structure, with less paperwork, and of course, less complexity.
However, as your business grows, you need to think long term. You must enhance the protection for your personal assets, to get more financing, to streamline the ownership structure, and to gain more credibility. To do so, it would be a wise business decision to turn your sole proprietorship into a corporation. Just look at these advantages.
It will protect your personal assets from business liability.
In a sole proprietorship, the owner and the business are one. Thus, the owner is personally liable for any lawsuits that may befall the business. This means that personal assets are at risk anytime.
Turning your business into a corporation will make it a separate legal entity. In case of business lawsuits, or even bankruptcy, your personal assets are no longer at risk because they are separate from your business assets. There are, however, some situations wherein you can still be considered liable, but this can be remedied by getting business liability insurance.
You will have more tax advantages.
Corporations in the Philippines enjoy several tax advantages, such as savings on self-employment taxes and deductibility on workers’ compensation and health insurance premiums. The tax savings are significant especially if the business produces large profits.
Being a separate legal entity, a corporation is a separate taxpayer with its own Taxpayer Identification Number (TIN). As such, it pays its own taxes, including withholding taxes, income taxes, and business taxes.
It shows legitimacy and credibility to your business.
In the Philippines, there is a perception that sole proprietorships are “small scale” businesses, while corporations are large scale operations.
A corporation conveys more legitimacy and credibility from the perspective of its stakeholders, clients, employees, partners, or vendors which helps in removing any doubts they may have about your business.
It will be easier for your business to acquire more financing.
A corporation not only establishes more credibility, but it has a better stock structure, transferability, perpetuity, and limited liability. In turn, this attracts more financiers, investors, and shareholders to the business.
On the other hand, you cannot bring in partners or have multiple owners in a sole proprietorship. Moreover, banks are more reluctant to grant loan applications from sole proprietors because they have smaller assets and their personal finances and credit history are considered.
There will be more flexibility in shares transfer within your business.
In a sole proprietorship, the business will end once the owner decides to stop its operations. In a corporation, there are other shareholders or partners who can continue the business even if its original owners resign, retire, or pass away. The current owners can transfer shares and pass the ownership to their offspring, even without a will.
A publicly traded corporation can freely trade interest or stock shares through a stockbroker. Its shares are transferable, as long as there are no prior agreements that restrict shares from being sold or transferred. Some regulations and laws may also limit the transferability of shares.
The process of transition is quite simple.
Your business can turn into a corporation by registering it with the Securities and Exchange Commission (SEC). The process is not that complicated as it is now streamlined by the SEC through the use of ESPARC. e.
The documentary requirements are still the same, however, these documents are now generated online and are stamped with an SEC barcode once completed. The files generated are:
Articles of Incorporation (AOI) and By-laws (BL)
The AOI provides your corporation’s name, the incorporators, the amount of capital paid in by each incorporator, their individual shares of stock, and the primary and secondary purposes of the business.
This certifies that your subscribers subscribed to certain shares of stock from the company and that these subscribers paid a certain amount as paid in capital upon subscription. . It also affirms the designation of your company’s Treasurer, with the Treasurer’s certification that he has received the funds stated in the articles of incorporations on behalf of the corporation and in what manner, be it in cash or other forms of payment in lieu of cash e.g real estate.
For ease of online registration, you should be ready with certain information so you can complete the online registration. Some of these are:
Desired name of the Corporation
Full office address
Primary purpose of the corporation
Details about the incorporations, directors and subscribers, e.g. full name, nationality, full address, tax identification number
Capitalization e.g. how much will be the maximum capital *authorized shares), how much will be bought (subscribed shares) and how much will be paid out of those subscribed shares (paid in capital)
You can also easily ascertain your registration or filing fee. The SEC filing fee is based on your company’s capital stock which can be computed using the SEC calculator: https://www.sec.gov.ph/online-services/registration-calculator/
When it comes to your business, the best option is to be guided by experts and professionals. Whether it be paperworks, registrations, or consultancy, we at FilePino make sure that your business is up and running.
You know what’s best for your business. Make your business into a corporation today.