In the Philippines, choosing between a one person corporation (OPC) and a sole proprietorship can be a tough decision for most small-time and startup entrepreneurs. Since the introduction of an OPC, a new business structure with a single stockholder in the Revised Corporation Code (RCC), many have been confused about its real difference from a sole proprietorship.
Sole Proprietorship and One Person Corporation (OPC): Detailed Comparison
While each business structure or entity, from ordinary stock corporation to partnership and sole proprietorship, has its own advantages and disadvantages, implications, and operational and compliance requirements, here is a detailed comparison of the two:
Legal Structure
A one person corporation (OPC) is a corporate structure registered with the Securities and Exchange Commission (SEC) and operates with a single stockholder. It has its own legal personality distinct from its owner. It is governed by the Revised Corporation Code of the Philippines (R.A. 11232).
Among business structures and entities, a sole proprietorship is the simplest, where a single individual or proprietor owns and operates a business. Unlike an OPC, however, there is no legal distinction between the owner and the business, and its registration is under the Department of Trade and Industry (DTI).
General Qualifications and Requirements
An OPC with a single stockholder may only be incorporated and registered by a natural person (i.e., Filipino citizen or foreign national), trust, or an estate. Foreign nationals, however, are allowed depending on the level of restrictions in certain investment areas and activities.
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. Additionally, banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-chartered government-owned and controlled corporations (GOCCs) are also not allowed.
For sole proprietorships, both Filipino citizens and foreign nationals need to obtain the necessary permits and register the company’s name with the DTI.
Liability
Since a one person corporation (OPC) is a separate entity, the owner’s personal assets will not be affected should the company go into debt. Instead, the debt of the company will be limited to what the shareholder owes.
The owner of a sole proprietorship, on the other hand is directly liable for the company’s finances. He or she will inherit the assets, income, debts, and losses. In case of debt, shareholders, creditors, or government agencies can go after the owner’s personal assets.
Management and Governance
Both an OPC and sole proprietorship are managed by a single person. In an OPC, the single stockholder is also the sole incorporator, director, and president. There is no board of directors to make decisions on important business matters. In the same way, a sole proprietorship does not need formal meetings or complex operational structures.
Taxation
In terms of taxation, there is a big difference between an OPC and a single proprietorship. An OPC is subject to a more complex corporate income tax, which is at a rate of thirty percent (30%), and required to file corporate tax returns. Under a sole proprietorship, a company is taxed according to the gross sales. If the revenue earned is less than PHP 3 million, it is subject to 8% final tax.
Government Compliance
As mentioned earlier, OPCs are registered with the SEC, and thus, annual reports, financial statements, and other documents required by the commission must be complied with. On the other hand, compliance requirements with the DTI are less stringent and lighter.
Business Capital and Funding
Between the two business structures, an OPC may have more access to business capital and funding opportunities given its stability and credibility. Sole proprietorships, on the other hand, may be limited to personal financial resources and loans.
Term of Existence
The company’s existence is perpetual if it uses the OPC format, unless stated in its AOI. The SEC also requires a nominee and an alternate nominee upon registering. In the event that the owner passes away or is not capable of running the business, the nominee can officially take over without having to re-register the business under new management. However, should the stockholder be a trust or estate, the corporation’s term of existence is co-terminus with that of the trust or estate.
Under a sole proprietorship format, the business can exist for as long as the owner is alive and decides to continue operations. Should the owner of the sole proprietorship pass away, the assets and liabilities of the business will be passed down to their children or heirs. The license to do business, however, expires with the owner. If the heirs plan to continue the business, they must obtain a new license.
Scalability
An OPC can easily switch to a regular or domestic corporation, provided that the articles of incorporation are amended with the SEC, and requirements are met. As for a sole proprietorship, once it grows and gains the capability to expand, it can also be registered as a corporation. Changing to a corporation gives the company more advantages, such as higher credibility, more favorable taxation terms, and better protection against business liabilities.
When deciding between a one person corporation (OPC) and sole proprietorship, business owners should consider various factors, such as liability protection, management preferences, tax considerations, funding needs, and scalability. After our analysis, both business structures have their respective pros and cons, so it is best to weigh these and see which one will make more benefits. It may also be helpful to consult corporate experts to get clarity on other aspects of these business structures.
… and you might just need our assistance.
Ready to start and register a one person corporation (OPC) or single proprietorship 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.
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