Most small businesses start off as a sole proprietorship – one of the simplest and most straightforward business structures in the Philippines.
Eventually however, many sole proprietors see an opportunity to transition into a more formal business model. It could be a long overdue turning point, a chance to upgrade a grassroots project into a thriving business. Perhaps it’s to accommodate a huge client who requires your business to operate as a corporation or an LLC. Or maybe it’s the risk of losing your personal savings or assets in case your sole proprietorship incurs any debts or liabilities.
Whatever your reasons may be, transitioning from a sole proprietorship to a corporation or LLC may seem like a daunting process, but it’s actually quite simple. In this page, we’ll take a closer look at some of the many benefits you can enjoy when you change from a sole proprietorship into corporation or LLC.
Benefits of Converting a Sole Proprietorship to Corporation
Transitioning a sole proprietorship to corporation comes with a multitude of benefits that business owners should consider, and these include:
Protection of Personal Assets from Business Liabilities
In a sole proprietorship, the owner and the business are considered one. Thus, the owner is personally liable for any lawsuits that may befall the business. This means that personal assets are also at risk anytime.
Turning your business into a corporation, even a one person corporation (OPC) will make it a separate legal entity. In case of business lawsuits, or even bankruptcy, your personal assets are no longer at risk because they are separate from your business assets. There are, however, some situations wherein you can still be considered liable, but this can be remedied by getting business liability insurance.
More Tax Advantages
Corporations in the Philippines enjoy several tax benefits, such as savings on self-employment taxes and deductibility on workers’ compensation and health insurance premiums. The tax savings are significant especially if the business produces large profits.
Being a separate legal entity, a corporation is a separate taxpayer with its own Taxpayer Identification Number (TIN). As such, it pays its own taxes, including withholding taxes, income taxes, and business taxes.
More Business Legitimacy and Credibility
In the Philippines, there is always a perception that sole proprietorships are “small scale” businesses, while corporations are large scale operations.
A corporation conveys more legitimacy and credibility from the perspective of its stakeholders, clients, employees, partners, or vendors which helps in removing any doubts they may have about your business.
Better Access to Business Financing
A corporation not only establishes more credibility, but it has a better stock structure, transferability, perpetuity, and limited liability. In turn, this attracts more financiers, investors, and shareholders to the business.
On the other hand, you cannot bring in partners or have multiple owners in a sole proprietorship. Moreover, banks are more reluctant to grant loan applications from sole proprietors because they have smaller assets and their personal finances and credit history are considered.
Seamless Continuity and Flexibility in Transfers of Shares
In a sole proprietorship, the business will end once the owner decides to stop its operations. In a corporation, there are other shareholders or partners who can continue the business even if its original owners resign, retire, or pass away. The current owners can transfer shares and pass the ownership to their offspring, even without a will.
A publicly traded corporation can freely trade interest or stock shares through a stockbroker. Its shares are transferable, as long as there are no prior agreements that restrict shares from being sold or transferred. Some regulations and laws may also limit the transferability of shares.
Option to Work as an Employee
Because corporations are a separate entity from its shareholders and owners, you can technically be employed under your own corporation. This makes you eligible to receive compensation income, in addition to the dividends you can get from the corporation. You’ll also be eligible for reimbursement for any expenses you might incur as an employee within the corporation.
Types of Stock Corporations (Corporate Structures) in the Philippines
There are two general categories of corporations in the Philippines: stock and non-stock. Stock corporations are those that have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held. All other corporations are nonstock corporations.
[a] Domestic Corporations. Duly registered with the SEC and other government agencies, domestic corporations may be 100% Filipino-owned, 60% Filipino-owned and 40% foreign-owned, or 40.01% to 100% foreign-owned (subject to certain provisions under the Foreign Investments Act).
[b] Foreign Corporations. These are corporations formed under laws other than those of the Philippines’ and whose laws allow Filipino citizens and corporations to do business in their own country. They have licenses and rights to do business in the Philippines, and they may operate a branch office, representative office, regional area headquarters (RHQ), and regional operating headquarters (ROHQ).
[c] One Person Corporations (OPCs). These are corporations with a single stockholder, who is also the sole incorporator, director, and president. An OPC is a new corporate structure introduced by the Revised Corporation Code of the Philippines (RCC).
In conclusion, converting a sole proprietorship to corporation can be a game changer for your business, as the new structure offers numerous advantages. For instance, you can protect your personal assets from business liabilities or transfer business ownership to your beneficial nominees should worst-case scenarios happen. Upon considering the transition, it is crucial to weigh these benefits in the light of the current business operations and other factors, make a thorough research on the business structures, and consult with the corporate legal experts.
… and you might just need our assistance.
Ready to transition from a sole proprietorship to corporation? 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.
