Starting a business in the Philippines can be both promising and challenging due to the country’s vibrant and rapidly evolving economic landscape. Known for its strategic location in Southeast Asia, young and skilled workforce, burgeoning middle class, and easing government regulations for foreign investments, the country creates a favorable environment for new ventures, particularly in technology, tourism, and manufacturing.
In this comprehensive blog, we’ll explore the various business structures available in the Philippines, including sole proprietorships, partnerships, corporations (including one person corporations, or OPCs), cooperatives, and specialized entities that foreign companies may establish as part of their expansion efforts. Read on and discover the key considerations, advantages and disadvantages, and recommendations.
What is a Business Structure?
A business structure, also called a business form, business entity, or business organization, is a legal and organizational framework under which a particular business operates. It defines the type of business ownership, management, liability, and taxation.
Key Considerations When Choosing the Right Business Structure
Choosing the right business structure is crucial as it affects various operational and financial aspects of the business. In doing so, the following key aspects may be considered:
Ease of Setting Up
Time is a valuable commodity, and it matters how soon a business can start operations. In the Philippines, sole proprietorships are the easiest to set up, usually requiring simple paperwork and registration with the Department of Trade and Industry (DTI).
Partnerships, on the other hand, require more effort, including drafting a partnership agreement and registering with the Securities and Exchange Commission (SEC). Corporations, however, involve the most extensive requirements, complex processes, highest costs, and most bureaucratic procedures.
Capital Requirements
Business capitalization provides the necessary funds to cover initial expenses. Sole proprietorships typically have the lowest capital requirements, relying heavily on the proprietor’s personal finances.
Partnerships may require higher capitalization, but this can be covered by pooled resources from multiple partners. Corporations, on the other hand, may raise the initial capitalization from the incorporators and soon issue shares for substantial investment.
Liability
Liability matters because it determines the extent to which the business owners are legally responsible for the obligations and claims. Sole proprietors face unlimited personal liability.
Partners also have shared liability, which can be unlimited in general partnerships. Interestingly, corporations offer limited liability protection, which can be advantageous for mitigating financial risks.
Management Style
Business management style affects decision-making processes, operational efficiency, and overall business dynamics. Sole proprietorships enjoy complete control over business decisions and operations, while partnerships usually involve shared decisions based on agreement. Among the three business structures, corporations have the most structured management system with a board of directors and officers.
Tax Implications
Taxation impacts a business’ overall financial health and profitability, and different business structures are taxed differently. In the Philippines, sole proprietorships and partnerships are usually taxed based on the gross sales. Corporations are subject to more complex corporate income tax. Dividends paid to shareholders even come with additional taxes.
1. Sole Proprietorship
Sole proprietorship is the simplest and most straightforward business structure, where the owner or proprietor has complete control over all aspects of the business.
In its legal aspect, there is no distinction between the owner and the business, which means that the owner receives all profits, bears all the losses, and takes liability for all debts and obligations incurred by the business. In terms of setup, the business requires registration with the Department of Trade and Industry (DTI) and comes with minimal regulatory requirements and administrative burden.
Advantages
Here are the top advantages of sole proprietorships:
- Simplicity and Ease of Setup. Registering a sole proprietorship with the DTI and other government regulatory agencies is typically quicker and involves few documents, making it an accessible option for small business owners and new entrepreneurs.
- Full Control and Flexibility. In a sole proprietorship, the owner or proprietor is the only decision-making body and has the control over all aspects of the business, allowing immediate implementation of changes and practices.
- Lower Capital Requirements and Costs. Sole proprietorships generally incur lower initial setup and operational costs compared to other business structures. There are fewer regulatory requirements and administrative burdens, which can lead to reduced expenses for compliance, reporting, and management.
Disadvantages
Here are the top disadvantages of sole proprietorships:
- Unlimited Personal Liability. While there is no legal distinction between the owner and the business, personal assets are at risk if the business faces financial difficulties, debts, and other legal obligations.
- Limited Access to Capital. Sole proprietorships often have limited access to capital, which normally comes from the owner’s personal resources and loans. There is also a struggle to attract significant investment or secure substantial loans.
- Business Continuity Challenges. Business ownership cannot be easily transferred to another person, even a family member. If the owner becomes incapacitated or decides to leave the business, it may be difficult to transfer ownership or ensure the business continues operating smoothly.
General Qualifications and Requirements
Any Filipino citizen of legal age (i.e., at least 18 years old) may register and operate a sole proprietorship business in the Philippines. Foreign nationals are also allowed, provided that they satisfy certain capital requirements and that the business is not included in the Foreign Investment Negative List (FINL).
Once the business name is registered with the Department of Trade and Industry (DTI), business permits and other clearances from the local government units (LGUs), i.e., barangay and city or municipality, must also be obtained. For tax compliance purposes, the sole proprietor must also register with the Bureau of Internal Revenue (BIR) for Tax Identification Number (TIN), registration certificate, and receipts. Employer registrations with the statutory agencies (i.e., SSS, PhilHealth, and Pag-IBIG Fund) must also be processed if the business will employ people other than the owner.
Ideal for Small Businesses and Startups
A sole proprietorship business structure is suitable for small businesses or solo entrepreneurs who want to test their business ideas. As mentioned, it requires minimal paperwork and low initial capital requirements. However, it may still require a lot of work, especially that the owner or proprietor has to decide, oversee, or even do most of the business activities — from product development to marketing and sales.
2. Partnership
A partnership is a business structure in which two or more individuals (or even entities), known as partners, come together to operate a business for profit, share material and non-material resources, and distribute the responsibilities, liabilities, gains, and losses among themselves.
Given the involvement of multiple individuals or entities, a legal agreement is imperative to outline the terms and conditions governing the business relationships. In regard to the liability of the partners, a partnership may be general or limited.
Advantages
Here are the top advantages of partnerships:
- Shared Responsibility and Resources. Partners can pool their resources, including capital, skills, and expertise, for the business establishment and operations. Depending on the agreement or type of partnership, duties and responsibilities are normally distributed among partners, and these can lead to more effective business management.
- More Access to Capital. With multiple partners, whether general or limited, partnerships can raise more capital than a sole proprietor alone. This can be used for initial operations, expansions, and other opportunities.
- Diverse Expertise and Perspectives. Partnerships benefit from the varied skills, knowledge, and expertise of each partner. The diversity can even lead to better decision-making, more innovative solutions, and a broader range of ideas.
Disadvantages
Here are the top disadvantages of partnerships:
- Joint Liability. General partners are jointly or severally liable for the partnerships’ debt and obligations, which also means that each is personally responsible for the entire amount of the liabilities, not just a portion. On the other hand, limited partners usually have liabilities restricted to their capital contributions.
- Potential for Disputes. While shared resources and varied skills may be taken as an advantage, these may also translate to conflicting opinions, management styles, and business goals. These can negatively affect business operations and jeopardize partnerships.
- Shared Profits. In a sole proprietorship, the owner enjoys all business profits, but in partnerships, these are divided among the partners based on the terms of the agreement. Limited partners usually have a smaller percentage of profits.
General Qualifications and Requirements
At least two (2) people enter into a legal agreement to form a partnership. Such agreement outlines the terms and conditions governing their business relationship, capital contributions, profit-sharing, management of responsibilities, and decision-making, among others.
Partnerships must register with the Securities and Exchange Commission (SEC). Endorsements or clearances from other government agencies, if applicable based on the nature or line of business, must also be secured. For limited partnerships, the word “Limited” or “Ltd.” should form part of the partnership name. After the SEC registration, the same permits and licenses from other government agencies that ordinary corporations require must also be obtained.
Ideal for Professionals and Joint Ventures
Unlike corporations, a partnership involving two or more professionals can be formed specifically for practicing a profession, making it especially well-suited for groups of professionals in related fields who each actively participate in managing the business. Such partnerships are prevalent among medical practitioners, lawyers, accountants, consultants, financial advisors, and architects.
3. Corporation
A corporation is a business structure or juridical entity that is separate and distinct from its owners, hence with its own rights, privileges, and liabilities. It has the legal capacity to enter into contracts, own property, and incur debts in its own name or independently of its shareholders.
Corporations are typically subject to stringent regulatory requirements, such as regular financial reporting and strict compliance with the corporate laws and regulations. Also, they are managed by a board of directors duly elected by the shareholders. Unlike sole proprietorships and partnerships, they can continue to exist beyond the lifetime of the founders or incorporators.
Advantages
Here are the top advantages of corporations:
- Limited Liability. Unlike sole proprietorships and partnerships, shareholders have limited liability, in which their personal or individual assets are generally protected from the debts and legal obligations of the corporation.
- Enhanced Capital-Raising Potential. Among all business structures, corporations have the most access to business capital by issuing and selling shares of stocks to investors. The proceeds may be used for expansion and development.
- Perpetual Succession. Corporations may continue to exist regardless of changes in ownership or the lifespan of incorporators. This ensures stability and continuity, which can always be advantageous for long-term business planning.
Disadvantages
Here are the top disadvantages of corporations:
- Complex and Costly Setup. Company incorporations (i.e., the process of forming corporations) involve the most complex and costly processes among all other business structures. These normally involve extensive legal and financial documentations, high registration costs, and lengthy approval timelines.
- Regulatory and Compliance Requirements. Corporations are particularly governed by the Revised Corporation Code (RCC) of the Philippines and are subject to strict regulatory requirements and compliance obligations. Regular financial reporting, audits, and adherence to corporate governance standards must always be observed.
- Complex Taxation. While taxation of other business structures simply depends on gross sales or income, corporations often face complex taxation, sometimes double, where the company’s profits are taxed at the corporate level while shareholders are taxed again on dividends or distributions.
General Qualifications and Requirements
To establish a regular corporation in the Philippines, there must be at least five (5) but not more than fifteen (15) incorporators who are natural persons of legal age and who must draft and file the Articles of Incorporation (AOI) and By-Laws with the Securities and Exchange Commission (SEC). They must also have the minimum paid-up capital based on the business type and sector.
Once the corporation is registered with the SEC, it must then register with the rest of the government regulatory bodies, local government units (LGUs), and statutory agencies and obtain the necessary permits and clearances. During the BIR registration, the corporation is also issued its own Taxpayer Identification Number (TIN).
Ideal for Medium to Large Businesses
The corporation type of business is mostly suited for medium to large enterprises that require substantial capital, want to limit personal liability, and plan for long-term growth. It is ideal for businesses seeking to raise funds through the sale of shares, those that need a formal structure for managing operations and governance, and companies aiming for a stable, ongoing existence that can outlast the involvement of any single individual. Corporations are also beneficial for businesses that plan to expand, attract investors, or need to comply with strict regulatory and reporting requirements.
4. One Person Corporation (OPC)
A One Person Corporation (OPC) is a new business structure in the Philippines, introduced in the Revised Corporation Code of the Philippines (R.A. 11232), that allows a single individual or stockholder to create and operate a corporation, combining the benefits of limited liability and simplicity of a sole proprietorship.
Like ordinary corporations, an OPC requires registration and compliance with the Securities and Exchange Commission (SEC). It has its own legal personality distinct from the owner, who is the single stockholder, sole incorporator, director, and president.
Advantages
Here are the top advantages of one person corporations (OPCs):
- Limited Liability Protection. OPCs in the Philippines can be compared with limited liability corporations (LLCs) in other countries. The personal assets of the single stockholder are separate from the corporate entity. Thus, they are usually not at risk even if the business suffers from financial difficulties or debts.
- Complete Business Control. While there are no other shareholders and directors, the sole stockholder and president has full control over all aspects of business operations, making decision-making and implementation of plans easier.
- Perpetual Existence. Unless stated in the Articles of Incorporation (AOI), an OPC may have a virtually unlimited life or an indefinite lifespan. In the first place, it does not hinge on the life of the single stockholder or incorporator. However, in the case of a trust or estate, its term of existence is co-terminus with the existence of the actual trust or estate.
Disadvantages
Here are the top disadvantages of one person corporations (OPCs):
- Limited Scope for Growth. Unlike ordinary stock corporations, OPCs may find it challenging to raise substantial capital given the single-stockholder arrangement. Equally, financial institutions may be reluctant to issue business loans for expansions and calling up.
- Increased Regulatory Requirements. While regulated by the SEC, OPCs must adhere to stringent corporate compliance and reportorial requirements. These include regular financial reporting, audits, and corporate governance standards, which can be burdensome for a sole owner or require additional costs and resources.
- Potential for Limited Expertise. Unlike ordinary corporations and partnerships, OPCs rely on the decisions of the single stockholder. Lack of business experience and bad decisions will negatively impact business and its overall profitability.
General Qualifications and Requirements
An OPC may be incorporated and registered with the Securities and Exchange Commission (SEC) by a natural person, i.e., a Filipino citizen or a foreign national, a trust, or an estate.
Foreign nationals are allowed, however, with restrictions in certain investment areas and activities. To add, any natural person licensed to exercise a profession is not allowed to organize an OPC for the purpose of exercising such profession unless otherwise provided under special laws.
The single stockholder must also appoint a corporate secretary, a treasurer, a nominee, and an alternate nominee. If the same single stockholder decides to be the self-appointed treasurer, a surety bond is required.
The process of SEC registration is almost the same as with an ordinary corporation. Once a certificate is issued, the business must also be registered with the LGUs, BIR, and statutory agencies. Read more about OPC Registration Process and Requirements here.
Ideal For Solo Entrepreneurs
OPCs are suitable for solo entrepreneurs with substantial capitalization and those who want to start and manage a business alone but prefer to take advantage of limited liability and other benefits of a corporate business structure.
5. Cooperative
As defined by the Cooperative Development Authority (CDA) itself, a cooperative is “an autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and accepting a fair share of risks and benefits of the undertaking in accordance with the universally accepted cooperative principles.”
In other words, a cooperative is a business structure owned and run by its members, who come and work together to achieve collective goals through a jointly-owned and democratically-controlled enterprise.
Advantages
Here are the top advantages of cooperatives:
- Democratic Control. While economic interests and democratic practices are at the forefront of cooperatives, members are typically given equal voting rights and participation in decision-making processes.
- Shared Benefits. Cooperatives promote equitable sharing of financial gains and benefits among the members based on their patronage of the services or their levels of participation.
- Community Focus. Most cooperatives are formed not just for the benefit of the direct members but also to serve local or specific communities and sectors, e.g., jeepney drivers and operators, farmers, etc.
Disadvantages
Here are the top disadvantages of cooperatives:
- Decision-Making Challenges. Like most democratic organizations, cooperatives often face slow decision-making processes amidst the fast-paced business environments given that decisions require consensus or a majority vote from all the members.
- Limited Access to Capital. Cooperatives do not issue shares of stocks. While their capitalization mostly comes from member contributions, there can be restrictions in terms of expansion or funding large-scale projects.
- Potential for Conflicts. Cooperatives involve many people, i.e., elected officers and members, who may have different opinions and interests on certain matters. If not managed well or resolved immediately, these may result in complicated issues that may impact the cooperatives’ operations.
General Qualifications and Requirements
In the Philippines, a cooperative can be formed by at least fifteen (15) individuals or members. Once the purpose or sector is determined, it may already seek registration with the Cooperative Development Authority (CDA), during which the Articles of Cooperation and By-laws are drafted and filed.
The cooperative must have a minimum capital requirement, which varies depending on its type and purpose. After CDA registration, it must obtain a Barangay Business Clearance and a Mayor’s Permit from the local government, and register with the Bureau of Internal Revenue (BIR) to secure a Tax Identification Number (TIN). Additional compliance with sector-specific regulations and obtaining additional licenses or permits might also be necessary, depending on the cooperative’s activities.
Ideal for Community-Driven Enterprises
Cooperatives are mostly suitable for groups and communities that want to pool their available resources and work together for their mutual benefit. In the Philippines, this business structure works well for local communities who want to address shared needs, workers who want to have equal stake and say in business, and even small producers or suppliers who aim to enhance their collective bargaining power. As a result, these cooperatives achieve greater economic and social benefits than they might individually.
Other Business Structures for Foreign Companies
Most, if not all, of the business structures discussed above are available and allowed for foreigners and foreign companies who are looking to establish a presence in the local market. Below are additional business structures:
Branch Offices
A branch office is an extension of a foreign company that operates and conducts business in another country, e.g., the Philippines. It is legally considered part of the parent company or its headquarters but subject to another country’s laws and regulations, corporate compliance requirements, and taxation.
Representative Offices
Unlike a branch office, a representative office cannot directly generate revenue or engage in profit-making business activities. It may only serve as a liaison between the foreign company and the local market and mostly engage in market research, product and service promotions, and provision of information to potential clients.
Regional Headquarters (RHQ)
A regional headquarter (RHQ) is a corporate office or administrative branch set up by a foreign company in a particular region. While not permitted to generate income, its primary function is to oversee, manage, inspect, and coordinate the company’s branch offices, affiliates, and subsidiaries within the jurisdiction.
Regional Operating Headquarters (ROHQ)
Unlike ordinary regional headquarters (RHQ), a regional operating headquarters (ROHQ) is permitted to generate income in another country on top of the basic functions of a headquarters. In many cases, it centralizes operational functions such as logistics, supply chain management, and business development.
In the end, each business structure – sole proprietorship, partnership, corporation, one person corporation (OPC), branch and representative offices, and headquarters — serves distinct purposes for local entrepreneurs and foreign companies expanding into new markets. Choosing the right structure depends on various factors, such as the business goals and activities, and affects the various operational and financial aspects that lead to profitability and sustainability.
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Ready to incorporate and register your business in the Philippines? Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.
