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.
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.
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.
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.
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.