Starting your own business is definitely not an easy process. There are many things you need to consider and many complex decisions to make. One of them is choosing the proper business structure. According to tax services in Manila, how you choose to register your business affects many things from tax compliance regulations to working capital management, which all influence the cash flow and use of resources. Discover the differences between a sole proprietorship and one person corporation, which may sound similar because of their singular reference but have many nuances between them.
A sole proprietorship is the simplest form and most common business structure in the Philippines. This type of business structure allows one person to oversee the entire operation of the company and the owner owns all assets and is also responsible for all its liabilities. It does not draw a line between the owner’s personal and business’ assets and liabilities.
One of the advantages of sole proprietorships is that it is easy to set up and is not that costly. It is relatively affordable and you don’t need a lot of funds to get started because there are also not very many regulatory requirements to get it up and running. The whole process of registration can be done by the owner and will not require any external assistance. You may not need help from accounting services in the Philippines which also do business registration services.
Another advantage of this type is it makes record-keeping easy. The business owners’ assets and liabilities are not separated from the business. Hence, keeping track of the ins and outs of their financial operations is easy. Although not separating the financial accounts is easy, it is still recommended that company owners separate their personal and business financial accounts.
A disadvantage of this type of business structure is owners do not have protection from their liabilities. There is no difference between the business and its owner. Your personal assets like home, cars, jewelry, real estate investment properties, etc., may be used or seized for your business’ unsettled liabilities. Sole proprietorships will not be good for running high-risk businesses like lending. However, straightforward businesses that sell goods and services may find this business structure advantageous.
One Person Corporation
A One Person Corporation is a fresh and new type of business structure that was recently implemented thanks to the Revised Corporation Code. According to tax and audit services in the Philippines, this form of business structure offers the benefits of a sole proprietorship and the limited liability of a traditional corporation.
In the past, this type of business structure used to be only available to religious organizations. In this type of business ownership, a single stakeholder will serve as the director and the president of the company. The stakeholder will then appoint an alternate nominee in case the presently appointed one will be unable to fulfill his or her duties. This is an option ideal for new businesses since it does not have multiple partners, unlike a traditional corporation which required at least three incorporators.
One of the advantages of this new type of business structure is its ability to apply for bank loans. Applying for a bank loan is a major drawback for sole proprietorships because they’re missing the formality of a corporation. Thus, it’s easier to seek out loans and investors for this structure because you can inspire confidence with your financial statements.
Another advantage of this structure is the separation of personal and business assets and liabilities, unlike a sole proprietorship where there’s no liability protection. OPCs can enjoy their full control of the business because it’s a juridical entity. They don’t have to worry about their personal assets because if the business falls into debt or liabilities, the business owner’s personal assets would be protected.
A disadvantage of this type of business structure is it requires more paperwork. The additional requirements for this type of business structure may include the following:
- Audited financial statements
- Response explanatory report to the recommendations and audit findings
- Disclosure of self-dealings between the director and OPC
Another disadvantage is it is limited to certain types of businesses. There are businesses that are not allowed from forming a one-person corporation. Professionals such as lawyers, teachers, and doctors are not allowed to form a one-person corporation. Financial institutions and banks are also prohibited from forming an OPC.
What Business Structure Should You Use?
The business structure plays a crucial role in the success of businesses. That is why it is important that you take the time to know and understand what the available business structures offer. There are also many professionals and consultants that offer the services that you need. You can contact our accounting services in Pasig as we can help you choose the most beneficial business structure.