Besides a viable product or service, selecting the right legal business structure is essential when starting a business. In the Philippines, you may register your business as a sole proprietorship, partnership, corporation, and one-person corporation or OPC. But which one is the best option for your business?

Choosing among the four common business structures in the Philippines dictates where you register your business, the additional requirements, taxes, and the extent of liability.

Furthermore, registering your business is not just a legal requirement for business in the Philippines. It is a strategic step that enhances credibility, fosters trust, and unlocks market opportunities.

In this guide, we’ll explore the different legal business structures, shedding light on the ‘why” behind ‘what’ you choose. Read on to make informed decisions that will be your passport to legitimacy and success.

A business legal structure is a classification the government requires all businesses to have upon registration. It establishes the framework that defines its ownership, management, tax obligations, and legal responsibilities within the eyes of the government.

Entrepreneurs must thoroughly evaluate their business goals, size, and risk tolerance to determine the suitable business registration option for their venture.

Once you have a business idea and business plan, it’s time to register your business. But before doing so, you must choose the appropriate structure for your company.

Here are the four types of business structures to choose from:

A sole proprietorship is the most common type of structure since it's also the simplest to set up. Only a single individual owns and controls the business in a sole proprietorship.

Regarding taxes, the owners pay income tax at either a graduated rate or an 8% rate. The graduated tax rates range from 0% to 35% depending on the taxable income, while the 8% rate only applies to those with yearly gross sales or receipts below Php 3,000,000.

To register a sole proprietorship, the business owner needs to go through the Department of Trade and Industry (DTI), the local government units (LGU), and the Bureau of Internal Revenue (BIR).

The main advantage of sole proprietorships is that owners have complete control over the business. All final business decisions will come from them, and they get to keep and manage the profits.

Another pro is it’s the easiest one to register. Compared to the other business structures, sole proprietorship has the least paperwork - all you need to do is apply for a name with DTI, get the necessary permits from the LGU, and register it with the BIR.

The main disadvantage of sole proprietorships is that owners have no protection from the business’s liabilities, as they are fully liable for all debts and losses incurred. Financial institutions can legally seize personal assets when the business suffers losses or goes into debt.

Sole proprietorships also can’t distribute shares, making it hard to attract investors. You can use other means like bank loans to fund your business.

If you start a business with at least one more person, where each contributes to the work and shares the profit, then your business structure is a partnership.

In a partnership, each partner agrees to contribute money or service and gets a share of the profit according to their capital contribution. Similarly, the partners distribute any losses in the same proportion they share the profits.

Additionally, partners are liable for taxes on the income they earn separately. For example, once the partners divide the profits among themselves, the amount a partner receives is now subject to income tax, which that partner should pay accordingly.

Common examples of partnerships are law firms, accounting firms, and physician groups. Because providing licensed professional services bears much weight and responsibility, their businesses can only be partnerships with unlimited liability to their stakeholders.

Business owners who want to establish a partnership should register with the Securities Exchange Commission (SEC).

A partnership has two types: general partnership and limited partnership.

In a general partnership, the partners evenly divide the profits among themselves. General partners play a role in managing the business’s operations, but they also bear unlimited liability in the company.

Unlimited liability means if the company or another partner takes on debt, all general partners are liable for it. The partners’ assets are also unprotected.

Meanwhile, partners are only liable for the amount of their contribution in a limited partnership. Limited partners also don’t have any management rights to the business.

An advantage of a partnership is you’re not alone in running the business. Partnerships distribute the workload and decision-making among multiple individuals, reducing the burden on one person.

Partnerships allow more resources. Partners can pool their financial resources and expertise, potentially enabling the business to access more capital and talent. It also helps if each partner has a different expertise, so one’s weakness can be another’s strength.

For limited partnerships, limited partners enjoy the protection of their assets since they’re only responsible for the amount of their investment.

Differences in opinion and conflicts among partners can arise, potentially leading to disagreements or disputes that may be challenging to resolve. It may also disrupt the harmony within the business and potentially affect employee morale and overall productivity.

You also don’t have complete control over the business in a partnership. Partnerships require a consensus on major business decisions, which can slow down the decision-making process.

While general partners enjoy more profits and control, they bear more risk as they have unlimited liability. Each partner is responsible for the business’s debts and liabilities, with their personal assets at risk.

Another option for a business structure is a corporation. Starting a corporation requires two to 15 incorporators, each with at least one share.

A corporation is a separate juridical personality from the stockholders owning the corporation. All stockholders enjoy limited liability as they are only responsible to the extent of their shared capital.

Business owners register their corporations with the SEC. When establishing a corporation, the SEC approves the authorized capital the company will have, which is the maximum amount of shares the company can distribute.

Moreover, corporations are subject to a corporate income tax of up to 25%. Depending on the type of corporation, they may also be exempted from paying income tax. Corporations can also use tax deductions to lower tax obligations.

Corporations can be stock corporations or non-stock corporations.

A stock corporation is your typical corporation, where the company divides the capital into shares and distributes them to the investors. Each investor will receive a dividend and portions of the excess profits, depending on how much they invested in the company.

On the other hand, non-stock corporations don’t issue stock shares. Instead of a shareholder, incorporators of non-stock corporations are called members. This type of corporation typically exists for charitable, religious, and educational purposes.

The most apparent advantage of a corporation is all stockholders have limited liability in the business, which means their assets are protected.

Corporations can often deduct a wide range of business expenses from their taxable income. Certain corporations, like non-stock and non-profit educational institutions, also enjoy income tax exemption.

A corporation is excellent for businesses that want to grow quickly since they can raise funds from investors. Being a corporation allows them to distribute equity to venture capitalists, helping them scale their operations.

A disadvantage of running a corporation is that it’s expensive and highly regulated. Registering a corporation and complying with reportorial requirements is complex and takes time and money.

A one person corporation or OPC is a stock corporation with a single stockholder. This business structure is like the incorporated version of a sole proprietorship, where the owner enjoys complete business control but has only limited liability.

When establishing an OPC, the owner acts as the company’s director and president. The owner needs to identify a nominee and alternate nominee, the following persons in line to run the business if the owner can’t fulfill the duties.

Being a corporation, a business owner should register the company under the SEC. They should also comply with the other requirements the LGU sets and register with the BIR.

Like sole proprietorships, the owner has complete authority over the company. The owners mainly control all business decisions and the business's directions.

An OPC also benefits from a corporation's limited liability, which means the owner’s assets are protected from the business’s liabilities.

Seeking funding is also easier since the formality of a corporation brings more credibility, inspiring confidence from financial institutions. However, once there is more than one stockholder in an OPC, they should convert their business structure to a traditional corporation.

A disadvantage of OPC is its more complex registration process compared to sole proprietorships. The additional paperwork can be a struggle, especially since the owner operates alone.

Another con is that not all businesses can register as OPC. Certain financial institutions and professionals exercising their profession are not allowed to register as OPCs.

OPCs also can’t go public since it goes against the nature of the structure, where there’s only one stockholder. Going public means a company can now sell shares or stocks to the public to raise capital.

How you register your company plays a crucial role in the business's success. But how do you know which one is right for you? Here are some factors you need to check:

If you want to grow and seek investors, start with a corporation where you can easily distribute shares to investors. Other structures can also seek funding differently but are less flexible than corporations.

Business owners who want full authority over the business should choose a sole proprietorship or OPC. These business structures allow the owner to operate independently and control the company.

Businesses like corporations and OPCs provide liability protection to their owners, which means their assets are protected if the company suffers losses.

Partnerships may also offer the same protection if the person involved is a limited partner.

Each business structure has its tax compliance requirements and rates. When assessing potential income, it’s essential to check how the government taxes a business to see which will be the cheapest.

Sometimes, being a sole proprietor can be beneficial because of the 8% tax rate. However, once you exceed the VAT threshold, being taxed as a corporation might become cheaper since it has lower graduated tax rates ranging from 0% to 25%.

A sole proprietorship is the easiest to register since DTI has fewer requirements than the SEC.

However, suppose your business fits more for a partnership or corporation based on the initial factors we mentioned. In that case, going through the hoops of complying with the SEC requirements can be more beneficial.

The legal structure can change if it no longer aligns with your requirements as the business expands.

While you can’t directly convert from a sole proprietorship to a corporation or OPC, and vice versa, you can legally close your current business and open a new one to register the new business entity.

Watch this video to learn more about your options in registering your business as well as shifting to a different business structure:

Each business is unique, and knowing how you want to run your business will determine the best structure for you. But if you’re still unsure of which business structure to choose or confused with the requirements needed for each, we can help you!

OneCFO can aid you with the registration process and also help manage your business finances, such as payroll, tax, and bookkeeping, so you can entirely focus on your growth.

Visit us at onecfoph.co or contact us at [email protected] to learn how you can maximize our financial services for your benefit.

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