Sole Proprietorship vs Corporation: What’s Best for Your Business?
There are two main business structures in the Philippines: sole proprietorship and corporation. Find out what's best for your business.
If you’re planning to open a business in the Philippines, there are two different structures you can choose from. You can mainly run your business under a sole proprietorship or a corporation.
So, what are the similarities and differences between a sole proprietorship and a corporation?
The general difference is the number of owners they could have. In a sole proprietorship, only one person owns the business. In a corporation, one or two people share ownership.
But there’s more to it than that. They also differ in their structure of ownership, benefits and drawbacks, registration process, and registration cost.
What is a sole proprietorship?
As a business structure, a sole proprietorship is a business that only has one owner. It has no shareholders or partnerships, no board members and board elections, and no share capital.
Unlike a corporation that has all these qualities, a sole proprietorship has a simpler business structure. You’ll have full ownership of the business — you have full control over it, you make all the decisions, and all the business profit and assets are yours and yours alone. You’re also personally responsible for all the liabilities your business could face.
Note: In the Philippines, Sole Proprietors and One Person Corporations are different.
What are the benefits of a sole proprietorship?
Being a sole proprietor has its advantages. Take note of these benefits and use them to your advantage.
- Less expensive and simpler process. Registering to DTI for a sole proprietorship has cheaper fees. The process is also simpler as there are minimal requirements. There’s also less paperwork involved. In fact, you can do the full registration online.
- Less complicated taxes. As a sole proprietor, you don’t have a separate business tax. So, filing your taxes is easier and more manageable. You only have to file for your income tax, meaning your taxes are generated from how much you earn or profit from your business.
Read more about your Tax Obligations as an Online Seller.
- No minimum capital. In the Philippines, there’s no minimum capital requirement when you open a business under a sole proprietorship!
- You’re the boss. Sole proprietors are self-employed. So, you make all decisions for your business. This makes it easier to manage your business because all your decision-making doesn’t have to undergo a more extensive process like board meetings.
- You keep all the profits. As a sole proprietor, you get to keep all the profits you earn through your business. You don’t have any business partners to divide your profits with.
- Lower tax rates. There is a lower tax rate for self-employed individuals. In the Philippines, it’s around 8% (as long as your annual income from your profit does not exceed Php3,000,000).
Also take note of these Tax Exemptions for MSMEs.
Disadvantages of sole proprietorship
Of course, disadvantages are inevitable. You might want to take note of these disadvantages, so you can strategize how to work around them.
- No legacy building. In case anything happens to you as a sole proprietor, or you decide to discontinue your business, your business cannot be passed down to anyone. This is because you’re the sole owner of your business. The business dies with you.
- No separation between assets and properties. As a sole proprietor, you’re personally liable for all your assets and liabilities. Should anything happen to your business assets and properties, you have to personally answer for them.
- No financial and liability protection. Since there’s no distinction between your personal and business assets and liabilities, there’s little to no financial and liability protection under a sole proprietorship. Should your business go into debt, you’re personally liable for it.
What is a corporation?
A Corporation is the exact opposite of a sole proprietorship. Under the RA 11232 of the Philippine Constitution, a corporation has a general classification of Domestic Corporation and One Person Corporations (OPCs).
A domestic corporation should have at least five incorporators. Incorporators are a group of people in charge of setting up and registering the corporation under the required government entities.
Aside from incorporators, a corporation should have shareholders. There’s no longer a minimum number of shareholders required to establish a corporation in the Philippines. A corporation can have a single shareholder established under an OPC.
What is a corporation made of?
Corporations have an extensive structure. Whether your corporation is a domestic corporation or an OPC, it has to be composed of the following:
- Shareholders. Shareholder own at least one stock or share ownership of the company. A domestic corporation can have 2-15 shareholder.
- Directors. Shareholders elect and vote for the company’s directors. A board member is entitled to the position for a year, or until shareholders find a replacement.
- Corporate Officers. These include the President, Corporate Secretary and Treasurer. The corporate secretary must be a Filipino citizen and familiar with local business laws.
What are the advantages of a corporation?
If you’re thinking of creating a business under a corporation, here are some of the advantages you can consider.
- Financial and liability security. You’re not personally liable for the debts and other legal obligations. A corporation is a separate legal entity from its owners. You’re only liable for the amount of investment you put into the company. Should your company go under debt, the corporation will be liable for those debts.
- Legacy-building. Should anything happen to you as one of its owners, you could always appoint a successor. If you decide to leave your company, you can always sell your stocks. There’s an opportunity for continuity in a corporation by transferring ownership stocks.
- Wider access to capital. Raising funds for a corporation is easier. Under a corporation, you can raise your capital by selling or trading your stocks. This would help with your business growth and save your company from bankruptcy.
What are the disadvantages of a corporation?
There are also disadvantages to establishing a corporation. These are:
- Expensive and lengthy registration process. Registering a corporation has a lot of requirements and a more expensive fee. Fees depend on the number of transactions you would have, the number of documents that need to be notarized, and other professional fees.
- Double taxation. As your personal assets and liabilities are separate from your corporation’s, you have to file for two taxations: one for your personal assets and liabilities, and another one for your corporation’s.
Where to register? DTI vs SEC.
Department of Trade and Industry (DTI)
If your business is a sole proprietorship, you have to register it with the DTI. A nameless business is unrecognizable, forgettable, and illegitimate. Making transactions when you’re an unregistered business is also illegal.
What are the registration requirements for DTI?
The registration process for DTI is almost fully online! All you have to do is make sure you have your scanned valid government-issued IDs prepared. Some valid government-issued IDs are:
- Birth Certificate
- Driver’s License
- Voter’s ID
Check the more detailed requirements and a step-by-step guide on Getting a DTI Business Permit Online.
#NinjaTip: Make sure you think of a unique and memorable name for your business. Your registered business name will be your trade name. Here are 5 Tips on Naming Your Online Store.
How much does DTI registration cost?
It depends on the scope of your business! The wider the scope, the higher the fee. Here are the four different business scopes and their corresponding fees:
- Barangay – Php200
- City/Municipality – Php500
- Regional – Php1,000
- National – Php2,000
There is also an additional Php30 fee for the loose Document Stamp Tax (DST).
Securities and Exchange Commission (SEC)
Your corporation needs to be SEC-registered to buy or trade shares of stock, bonds or interests from other businesses, and invest in other financial assets legally.
What are the registration requirements for SEC?
SEC offers a more extensive registration process as it requires a handful of processes and documentation. Since a corporation is also composed of two or more people owning the business, cooperation among business owners and board members is needed.
A successful registration process could also include approval from different government agencies, depending on the nature of business.
So, registering a corporation has more requirements. These include (but are not limited to):
- A SEC-secured and SEC-reserved business name
- Filled out SEC Application Form
- Drafted Articles of Incorporation
- Drafted By-laws
- Drafted Treasurer’s Affidavit
- Joint Affidavit of Undertaking to Change Name
- Notarized documents
How much does SEC registration cost?
It varies depending on the documents required for your business registration. The kind of corporation you’re registering factors in how much the fee would be.
You’ll also need to notarize your business’ properties and assets. Notarial fees vary depending on the value of the property; another factor for the varying fees for a SEC registration.
But, here’s a general idea of how much it would cost:
- SEC Registration Fee – Php2,530
- Business Name Reservation (valid for 90 days) – Php120
- SEC Express Lane (for fully online applications) – Php600
- Stock Transfer Books – Php500
- BIR Documentary Stamps – Php1,500
- Notarial fees – Php1,500
The general estimate of SEC Registration with its requirements is around Php6,750.
#NinjaTip: The BIR has updated its application requirements in 2020 and no longer requires a barangay clearance. You can now register for your BIR permit while simultaneously applying for a barangay clearance.
Which one should you choose, sole proprietorship or corporation?
It all depends on your financial capabilities and liabilities, plus the risks you’re willing to take. Consider all factors before deciding whether to go for a sole proprietorship or a corporation.
Take note of their advantages and see which one you can maximize best, while consider their disadvantages and see which one you can work around without major losses.
In the Philippines, it’s a common practice, especially for starting businesses, to establish a sole proprietorship first before transitioning into a corporation.
There you have it, ka-Ninja! What are you waiting for? Plan, register, execute and run your business like a boss.
Take advantage of these benefits for your business:
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