Are you thinking of starting a business? Expert tax services in Manila share that you must first decide the type of business structure to adopt. Doing so is critical to the success of your venture because it will determine the costing, taxes paid, ownership, and jurisdiction requirements. To get started, check out the different forms of business structure below and decide on the best one for your startup.
Determining what works for your company starts with knowing the advantages and disadvantages. The proper knowledge can guide you in making a sound decision you won’t regret. These are the three main business structures in the Philippines:
Sole Proprietorship
This is the simplest and least formal type of structure. This setup lives to its name because a single person exercises full authority and control over the enterprise. The proprietor or owner is the only individual who owns the assets of the company. At the same time, this person is also responsible for all the liabilities incurred by the business. In simple terms, the business and the person are considered the same entity.
Notably, no foreign person is allowed to own and operate a sole proprietorship in the country. A personal TIN or tax identification number is used for your sole proprietorship. You only use your personal TIN for the business and you abide by a graduated rate. According to tax and accounting services in the Philippines, this means the higher the income, the more tax dues you have to pay.
Advantages:
- Very little paperwork and startup expenses.
- You only apply for a business name and register your business with the DTI or Department of Trade and Industry.
- As the sole owner, you exercise complete control over the business
- You alone enjoy the profits incurred.
Disadvantages:
- You are solely liable for business debts.
- As the only person at the helm, any person or company suing your business could stake a claim on your personal assets.
- It could be harder to attract investors to generate capital because the business is linked with your personal assets.
Partnership
Partnerships are formed with two or more individuals. The Civil Code of the Philippines views a partnership as a juridical person. This means that the legal personality of the company is separate from the owners. You can choose from two kinds of partnership, limited and general. The former is such since some partners have unlimited liability, while others have liability that’s proportionate to how much they contributed to the capital.
Meanwhile, in a general partnership, all the partners share unlimited liability for all the company’s debts and obligations. Notably, if your partnership’s capital is more than P3,000, you are required to register it with the SEC or Securities and Exchange Commission. Foreign owners can own only up to 40% in a partnership.
When it comes to taxes, partnerships are taxed like corporations so it may be prudent to seek help from expert tax and audit services in the Philippines. The following taxes apply to partnerships and corporations:
- RCIT or regular corporate income tax: Yearly taxes paid based on earned taxable income.
- MCIT or minimum corporate income tax: This is paid on the 4th taxable year of business IF MCIT exceeds the RCIT.
- IAET or improperly accumulated earnings: These are taxes paid if you accumulate earnings that are greater than 100% of the paid-in capital.
Advantages:
- Attracting investors is easier because people are more willing to pool their money in a partnership since it utilizes the company’s collective assets.
- In some cases, two or more heads are better than one.
- A limited partnership doesn’t risk your personal assets since you’re only liable for how much you contributed to the initial investment.
Disadvantages:
- You don’t have full control or autonomy over how things are done.
- General partners are deemed liable for both business decisions and debts incurred by other partners for the company, putting personal assets at risk.
Corporations
A traditional corporation is owned by a minimum of 5 and a maximum of 15 shareholders, with each incorporator holding at least one share. Liability is limited to the same proportion of capital share. Recently, the government allowed a one-person corporation or OPC where there is only one owner. The difference between this with a sole proprietor is that the corporation is a separate entity.
Any corporation must be registered with the SEC, with a minimum paid-up capital of P5,000. Similar to a partnership, a foreigner can only enjoy owning 40% of either a stock or non-stock (mostly for nonprofits) corporation.
Advantages:
- Considered as a separate personality so personal assets are safe from liabilities.
- Enjoy perpetual succession even if the incorporator dies.
- Take advantage of tax perks and incentives accorded to small businesses
Disadvantages
- It is more expensive and complex to set up than other structures.
- Major decisions need to be approved by the board.
The Philippine Government encourages business investment to stimulate the economy. To ascertain the success of your business, careful planning is key and determining which structure is best for you. Call our team as we provide tax and accounting services in Pasig. We can help with business registration to ensure your success right from the start.
