As an initial step, you must choose the type of entity through which your business will run. There are many things to consider such as ease of maintenance, tax treatment, personal liability for debts, ease in raising capital and others. You should review the following to determine which organizational structure works best for you.
A. Types
There are different types of business organizations in the Philippines. The more common types are sole proprietorships, partnerships and corporations.
1. Sole proprietorship
A sole proprietorship is a type of business organization in which an individual personally owns the business. The sole proprietorship has no separate legal personality from its owner and the latter is personally liable for all its debts and obligations. Registration of sole proprietorships is with the Department of Trade and Industry (“DTI”).
2. Partnership
A partnership is formed when two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits and ownership among themselves. While the partnership is a separate legal entity from its partners, the latter are personally responsible for the debts and obligations of the partnership. Registration of partnerships is with the Securities and Exchange Commission (“SEC”).
3. Corporation
A corporation is owned by several people, called shareholders, and has a personality separate and distinct from them. Shareholders are responsible for the debts of the corporation only up to the extent of their capital contribution. Corporations can either be stock or non-stock and are controlled by the Board of Directors or Trustees. Registration of corporations is with the SEC.
There are also joint ventures in which two or more entities solidarily bind themselves under a contract to undertake some commercial enterprise.Joint ventures require a community of interest in the performance of the subject, a right to direct and govern the policy connected therewith, and the duty, subject to the agreement of the parties, to share both in profit and losses.1. The relationship of the joint venture partners is generally governed by the terms of the joint venture contract, supplemented by the law on partnerships. As a rule, corporations cannot enter into partnerships with one another but they are allowed to enter into joint ventures.
B. Which type is best for my business?
In deciding the type of business organization, the following factors should be taken into consideration:
1. The liability of owners for all business debts and obligations;
2. Tax treatment;
3. Control and management of the business;
4. Ease of raising capital; and
5. Ease of establishing the business.
| ISSUE | SOLE PROPRIETORSHIP | PARTNERSHIP (AND JOINT VENTURES) | CORPORATION |
| Liability of Owners | The owner is personally liable for all the obligations of the sole proprietorship. | Partners are personally liable for all the obligations of the partnership. This means that if the partnership declares bankruptcy, the unpaid creditors can run after the personal assets of the partners. | Liability of the owners is limited to their share in the capital. If a corporation becomes insolvent, the shareholders are not liable to pay for the corporation’s outstanding debts. |
| Tax Treatment | Taxed as individuals. Percentage ranges from 5%-32% depending on the taxable amount. | Generally, fixed at 30% of net income. | Generally, fixed at 30% of net income. |
| Control and Management | The owner has full control of the business. | Management is directed by the partners holding a majority stake. | The Corporation is controlled by its Board of Directors. Members of the Board of Directors are elected by the shareholders. |
| Ease of Raising Capital | Limited by the credit-worthiness of the owner. | In a partnership, the partners jointly raise capital for the business and agree on contribution and sharing. Debts may be incurred by the partnership and the partnership leverages the collective credit-worthiness of all partners. | Corporations have various options in raising capital such as equity financing, debt financing, stock-option plan, debt-to-equity conversion, etc. Investors are aware that their personal assets are insulated from creditors in case of the corporation’s insolvency. |
| Ease of Establishment | Sole Proprietorships are the easiest to establish as only registration with the DTI is required.Bureau of Internal Revenue (“BIR”) registration and local business permits are also required. | Partnerships are registered with the SEC. BIR registration and local business permits are also required.Joint Ventures are not required to be registered. They may be created by agreement of the parties. | Corporations are registered with the SEC.BIR registration and local business permits are also required.The SEC and the BIR require annual reports in the form of General Information Sheets and Financial Statements. |
