There are a lot of small businesses that start off as sole proprietorships – it’s one of the simplest and most straightforward business structures, after all.
Eventually however, many sole proprietors see an opportunity to transition into a more formal business model. It could be a long overdue turning point, a chance to upgrade a grassroots project into a thriving business. Perhaps it’s to accommodate a huge client who requires your business to operate as a corporation or an LLC. Or maybe it’s the risk of losing your personal savings or assets in case your sole proprietorship incurs any debts or liabilities.
Whatever your reasons may be, transitioning from a sole proprietorship to a corporation or LLC may seem like a daunting process, but it’s actually quite simple. In this page, we’ll take a closer look at some of the many benefits you can enjoy when you change from a sole proprietorship into a corporation or LLC.
Converting from sole proprietorship to a corporation protects your personal assets by setting it apart from your business assets. In case of potential bankruptcy or a lawsuit filed against your company, your personal assets will no longer be put at risk. The same applies when you’re transitioning into an LLC.
This means that if in case your sole proprietorship has risky finances or is a legal liability, forming an LLC or a corporation will effectively protect your personal assets. There are however, some situations wherein you can still be considered liable, but this can be remedied by getting business liability insurance.
Transitioning into a corporation is also an effective way to save money on taxes, which can be quite significant especially for businesses raking in large profits.
Compared to sole proprietorships, corporations get easier access to financing.
A sole proprietorship has a single owner, and is unable to accommodate investors who can share in the businesses profits. A corporation on the other hand, can attract investors due to its stock structure, transferability, perpetuity, and limited liability. Getting a loan is also a more stressful and tedious process for sole proprietors, as their personal finances and credit history are considered.
The corporate business structure keeps any business running, even when its original owners resign, retire, or pass away. This enables current owners to transfer shares, allowing them to pass ownership to their offspring, even without a will.
In case a sole proprietor passes away, the entire business property and all income are transferred to the estate, and will be available only for the personal and business creditors of the owner.
Corporations in the Philippines enjoy several tax advantages, such as savings on self-employment taxes and deductibility on workers’ compensation and health insurance premiums. If you want more information on the potential tax advantages you can gain by switching to a corporation, consult a tax advisor or an accountant.
Because corporations are a separate entity from its shareholders and owners, you can technically be employed under your own corporation. This makes you eligible to receive compensation income, in addition to the dividends you can get from the corporation. You’ll also be eligible for reimbursement for any expenses you might incur as an employee within the corporation.
In the Philippines, sole proprietorships are often thought of as “small scale,” while corporations are perceived as large scale operations.
While it’s true that success does not depend on the size of your company, gaining more credibility when you operate as a corporation still brings a lot of benefits, and will help clients, employees, partners, or vendors cast away any doubts they may have about your business.
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.
Corporations are considered a separate legal entity, which essentially makes it a separate taxpayer with its own Taxpayer Identification Number (TIN). As such, it pays its own taxes, including withholding taxes, income tax, and business taxes.
Want to know more about corporation registration in the Philippines? Talk to our team today! Call us at +1.806.553.6552 or send us a message here.