There are many steps to company formation in the Philippines: finding the right location, hiring skilled staff, securing financing, and projecting overhead costs, among others.
And if you’re establishing a corporation, you also have to decide whether it will be a stock or non-stock entity. What exactly is the difference between the two? Read on to know more.
Before we discuss stock and non-stock corporations, let us first define what a corporation is.
In a nutshell, a corporation is a legal entity set up by a group of people with the purpose of operating a venture. Many entrepreneurs prefer establishing a corporation because the law considers a corporation as distinct from its owners. Why is that important?
When you incorporate a company, it is treated as if it were an individual with its own set of rights and responsibilities. Should a venture go under, owners are not personally liable for any losses the corporation incurs. As such, their personal assets will not be liquidated to pay off the venture’s financial obligations; instead, they will only lose the capital they invested.
As per company formation law in the Philippines, a corporation must be owned by a minimum of two and a maximum of 15 individuals.
The difference between the two is fairly simple: a stock corporation is for-profit while a non-stock corporation is not. Below is a deeper dive into the two classifications:
In a stock corporation, the capital is divided into shares which are then distributed to investors. Shares are often offered to raise money for the business, either as seed capital or as funds for expansion.
When the corporation makes a profit, it is distributed to investors through dividends. Shareholders elect a board of directors who will oversee the venture’s operations to ensure its continued profitability.
As previously mentioned, non-stock corporations are not profit-driven, hence they do not issue shares. Instead of a board of directors, the governing body is called the board of trustees.
The people who comprise a non-stock corporation are simply called members, though they have the same role as shareholders. This means they can vote on matters pertaining to the running of the venture.
While many non-stock corporations are indeed non-profits such as NGOs and charities, there are several scenarios where a business will choose to incorporate as a non-stock entity. These include:
The founding of a “closely held” corporation that has only a few members and has no interest in selling shares
The founding of a corporation that exists only to complete a specific purpose, such as a one-time project.
The founding of a corporation for the sole purpose of entering a joint venture with another company or individual.
In all three scenarios, there is no profit motive — by and large, the setup is largely operational in nature and intent.
As with all things in life and business, stock and non-stock corporations have both upside and downsides. Be sure to carefully weigh each when incorporating your organization:
Advantages of stock corporations:
Limited liability. The corporation’s finances are separate from the personal finances of its shareholders.
Efficient fundraising. If your corporation needs to raise capital, the board can move to offer more shares to investors.
Easy transfer of shares. Should a shareholder cash in his investment, you can simply offer his shares to another investor.
Disadvantages of stock corporations:
Steep setup costs. The Securities and Exchange Commission (SEC) often requires hefty minimum paid-up capital requirements for corporations.
Strict regulation. Corporations are strictly regulated by the SEC and other government agencies to ensure that their operations are all above the board.
Wary creditors. Limited liability corporations can deter creditors because if a business shuts down, they may not be able to fully recover the money they lent.
Advantages of non-stock corporations
Tax exemptions. Since a non-stock corporation is not a profit-generating operation, it’s also exempt from paying taxes.
Limited liability. Members of the non-stock organization are also not personally liable for any losses the organization incurs.
Disadvantages of non-stock corporations
Complicated filing process. Non-stock corporations must fully justify their tax-exempt status.
Strict compliance. Like all corporations, they must also furnish an annual report that clearly states cash inflow and outflow.
How you incorporate your organization is one of the most crucial decisions you will have to make. If you need expert advice on how to put up a business in the Philippines, please feel free to get in touch with us at +63.917.892.2337 or send a message here.