In business, the use of a proper business entity or structure could bring about more business success, and the wrong choice could prove to be a failure. In most of our seminars on basic business accounting and tax compliance or basic bookkeeping for entrepreneurs, the following question is almost always raised:
“Which is better, a SOLE PROPRIETORSHIP or a CORPORATION?”
There are a number of ways where we could evaluate the two and no fast rule could answer the question because advantage in one aspect could be coupled with a disadvantage in other aspects so the choice would depend on which aspect gives more weight. Nevertheless, we feel that using a corporate set-up could best be beneficial in the following ways:
1. Limited liability in a corporation. In an instance where corporate assets fell short to pay its obligations and eventually shuts down, stockholders cannot be made liable to the extent of their personal assets. In a corporation, stockholders are only liable to the extent of their investments to the corporation, no more, no less. In a sole proprietorship, the legal entity of the business and that of the owner is the same, though, they are treated separate for accounting and tax compliance. In case the business incurs liability and could not pay, the separate personal assets of the owner could be held to pay for such liabilities.
To illustrate, let us take for example a trucking service business who was contracted to transport an expensive chemical from Metro Manila to Baguio for a fee. Along the way, the truck met an accident and the driver was at fault. A case was filed in court by the owner of the cargo and the trucker was made to pay by the court a material amount.
On the above example, if the trucker is a corporation, then, the cargo owner can only resort to corporate assets and if the same is insufficient, the stockholders of the trucker company could not be held liable. However, if the trucker is a sole proprietorship, then, the owner will feel so sorry because his personal properties may have to be used to pay the same. Exception to this limited liability is the concept of piercing the veil of corporate entity where the legal entity of a corporation is disregarded if it is used to justify a wrong, protect a fraud, and such other ill instances. This however, would require a court intervention and is not that easy to apply.
2. Credibility of a large scale business. In the Philippines, common observation is that sole proprietorship is for small scale, while a corporation is for a large scale business operations. With much respect, we beg to disagree to this notion. We believe that being big is not really becoming big, but sometimes, a simple though of one being big would suffice. As a matter of fact, you can register a basic domestic corporation with PhP5,000.00 paid-up capitalization. Here is how we came about with this. (Update as of 2019: Revised Corporation Code of the Philippines no longer requires a minimum capitalization unless required by law.)
When we started this SME education advocacy on basic business accounting and BIR compliance in mid-2010, we initially used a sole proprietorship business for our personal convenience – evaluating the market, marketing strategies, facilities, and funding. That time, online marketing is up but there had been instances of fraudulent online sales – fictitious items and services sold but after initial payment, the seller is nowhere to be found. We require a reservation fee for the seminar workshop so some prospective participants doubted on our services as one same online fraud. I remember one participant who scouted at our office venue the day before and seeing no marks on the building about the event and the entity, it cancelled the reservation. Some only ended up with inquiries and never showed up on the day of the event.
The above instances gave us the though a using a corporate entity because in a corporate entity, we believed that we could lend credibility from the structure. With the corporation, the intended participants would have the impression of a large scale so they cast away their doubts. True enough, more participants are now coming in to participate. At present, we have participants coming in not only from Metro Manila, but from other parts of the country – or should I say, from all over the country. We have some participants from Ilo-ilo, Batangas, Laguna, Cavite, Pangasinan, Subic, Ilocos Sur, Baguio, and counting as we go along. We also had a pending invitation from a School in Southern Leyte for a one-day seminar program.
3. Public view of more heads running the business.This goes with the saying, “two heads are better than one”. In a sole proprietorship, the owner might have some employees but it could not do away with the impression that its only one running the same. In a corporation, public is aware of the number of persons in it – the Corporation Code requires at least five (5) to fifteen (15) incorporators to form a corporation. (Update: The Revised Corporation Code no longer require these numbers. A single person can now register an OPC (One Person Corporation).
This could also be used in pricing. Let us say the quote has been made under a business proposal. If the proposed client or customer would ask for a reconsideration, the sole proprietor will tend to be caught up to answer immediately. On the other hand, the corporate owner representing the corporation could simply say that he will have first to consult the Board of Directors for the unusual price consideration and could not decide outright. As such, he could not be left alone in a corner avoiding to compromise the business relationship in giving a “no” answer, if warranted.
4. Better tax management perspective. This one is also a great one. At a glace over the Tax Code, a sole proprietorship is tax at a progressive rates of 5-32%(Update: TRAIN Law progressive income tax rates for sole proprietorship is 20-35%), while a corporation is taxed at 30% on its taxable net income, so it appears that the corporation enjoys lower income tax rate than a sole proprietor. There could be more business expenses in a corporation that could not be made in a sole proprietorship, e.g. director’s fees, business meeting expenses, etc. All income of a sole proprietorship is taxed immediately under its owners account, while in corporation, net income after tax is taxed only upon actual distribution of cash or property dividends. In computing 40% optional standard deductions, corporation considers cost of sales while that of sole proprietorship is based on gross sales or net receipts.
5. More long-term structure. Natural persons could not live longer than corporations. Look around and observe big corporations and you will see some hundreds or thousand years old corporations. In a sole proprietorship, the death of the owner carries the death of its legal entity. In a corporation, the death of the founder simply leaves the legacy and a concrete evidence of how he lived and managed his business in a corporate set-up. In other words, if you want to be remembered in generations, you can put up a corporation with your name, manage it the best of what you can until its peak of success and maintain the same so when you die, your name will live indefinitely throughout the life of your corporation – decades or centuries and centuries.
As they say, men who want to be immortal may plant a tree, or raise sons that they will continue the virtue and the attribution to the name. Now, we propose an addition – register a corporation and be successful in it.
There could be more reasons of using a corporation over a sole proprietorship and there could be more stories about it. What matters is how you see it best and how you manage your business. After all, success is not purely dependent upon the structure, but a matter of how it operates.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. You can send your comments and feedback at firstname.lastname@example.org.
Registration of Corporation. With our years of practice, we have already registered various corporations with the Securities and exchange Commission and other government agencies. We are confident that we could help you determine the appropriate corporate set-up for you, register the same and have it readied for your operations.
For foreign investors, there could be a number of options on what entity to use for Philippine operations. We could assist you determine which is most appropriate for your tax-efficient Philippine operations and register the same with various government agencies so you could operate based on your timeline.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.
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