When starting a business in the Philippines, it’s important to know the kind of structure that will best suit your fledgling company’s needs. Your choice will determine how it will be taxed, who will be liable, and how long it can operate as a business.
You can select between a one-person corporation and a sole proprietorship. Understanding the nuances of each one can help you decide which is best for your business.
In lieu of the absence of the Limited Liability Corporation (LLC) in the Philippines, you can choose a one-person corporation (OPC) instead. In a one-person corporation, the company is formed with a single stockholder that acts as both the director and the president. It is also a separate entity from the owner. The single stockholder can only be a natural person, trust, or estate.
Known for being the simplest form of business in the Philippines, the business ownership structure of a sole proprietorship is one that is owned and managed by one individual. Forming a sole proprietorship is easier to set up and register, as well. It requires a minimal amount of capital and has fewer regulations than other business types.
You must appoint a president, treasurer, and corporate secretary to establish this. The single stockholder can be the corporate treasurer but not the corporate secretary. The group should also file articles of incorporation and submit financial statements annually. These articles of incorporation include the primary purpose of the business, term of existence, details of the single stockholder, and the nominee and alternate nominee.
Banks, insurance companies, publicly-listed companies, and non-chartered government-owned-and-controlled corporations are not allowed to form OPCs. Foreign nationals, on the other hand, are allowed to do so depending on the level of restrictions in certain investment areas and activities. One-person corporations must also add “OPC” at the end of their company name.
You only need to obtain the necessary permits and licenses and register your company’s name with the Department of Trade and Industry (DTI).
The company’s existence is perpetual if it uses the OPC format. The Securities and Exchange Commission (SEC) will require a nominee and an alternate nominee upon registering. In the event that the owner passes away or is not capable of running the business, the nominee can officially take over without having to re-register the business under new management. However, should the stockholder be a trust or estate, the corporation’s term of existence will be co-terminus with that of the trust or estate.
Under this format, the business can exist for as long as the owner is alive and decides to continue operations. Should the owner of the sole proprietorship pass away, the assets and liabilities of the business will be passed down to their children or heirs. The license to do business, however, expires with the owner. If the heirs plan to continue the business, they must obtain a new license.
Since this is a separate entity, the owner’s personal assets will not be affected should the company go into debt. Instead, the debt of the company will be limited to what the shareholder owes.
Here, the owner is directly liable for the company. They will inherit the assets, income, debts, and losses. In case of debt, shareholders, creditors, or government agencies can go after the owner’s personal assets.
The business using the OPC format is taxed at a fixed rate of 30%. OPCs can also use itemized deductions in their taxes to cover the cost of goods and services.
Under this, a company will be taxed according to their gross sales. If the revenue earned is less than P3 million, the sole proprietorship will be subject to 8% final tax.
Switching to a different structure is possible for both business types. A one-person corporation can easily switch to a regular or domestic corporation, provided that the articles of incorporation are amended and requirements are met.
As for the sole proprietorship, once it grows and gains the capability to expand, it can become a corporation. Changing to a corporation gives the company more advantages such as higher credibility, more favorable taxation terms, and better protection against liability.
To become a corporation, you need to have four other incorporators and a board of directors. You can also form a one-person corporation since any natural person, trust, or estate can create one.
Start your own business successfully with FilePino, the go-to team for establishing small to medium-sized startup companies in the Philippines. Learn more about company formation in the Philippines by giving us a call today at +63.917.892.2337. You may also send us a message here.
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