Aside from identifying your products or services and building your team, selecting a business structure is essential when starting a brand. Getting its specifics straight makes your company more legit and impacts various components of your business, including taxes and personal liability.
In the Philippines, there are many types of business structures a budding entrepreneur can choose from. If you want to learn about their pros and cons, read on and let this article help you decide which one best suits you and the business you have in mind.
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4 Common Types of Business Structures in the Philippines
Although different business structures exist with varying benefits, there are still factors that you, as an entrepreneur, must consider to find which ones would fit your requirements.
While changing a business structure is possible in the Philippines, it comes with additional administrative processes before it’s finalized. With this in mind, reviewing your options carefully before making a move is important.
Below are the common types of business structures you can look into:
Sole proprietorship
A sole proprietorship is the most basic type of business structure in the Philippines because it’s the simplest to set up. Sole proprietors such as general merchandise stores, small retail establishments, and ready-to-wear (RTW) shops are liable for the business’s liabilities, debt, and losses.
Pros
- You get complete control of your business as the sole owner.
- It’s easy to start and change your structure in the future.
- Little paperwork is needed as owners only need to apply for a business name and register their business with the Department of Trade and Industry (DTI).
Cons
- Since you’re fully liable for your business’s debts, there may be no legal distinction between your private and business assets.
- It’s challenging to attract investors compared to the other structures.
Partnership
A partnership business structure is formed by two or more people who agree to do business together to gain profit. Partnerships are most commonly seen in law firms, real estate investment networks, and physician groups. The owners contribute to the company through skill, funding, labor, or something similar, and they also share the revenue when the sales come in.
There are two types of partnerships:
General partnership
General partners agree to share all profits of the business evenly divided into percentages. They can also participate in the partnership’s daily operations, and each has unlimited liability for their own actions.
Limited partnership
Limited partners are only responsible for the sum invested in the partnership. Compared to general partners, limited partners have no management rights or input into company operations.
Pros
- You have someone or people to share the responsibility.
- It’s easier to attract investors.
- In limited partnerships, there’s no risk of losing your assets since you’re only liable for your investment.
Cons
- Partner conflicts may arise.
- You have no absolute control over the business.
- General partners are liable for other partners’ business decisions and debts, which may put your assets at risk.
Corporation
You’ll need 15 people to arrange a corporation for lawful purposes. A corporation in the Philippines is treated legally as a personality separate, distinct from the stockholders who own the corporation. Some of the top corporations in the country include Manila Electric Co., BDO Unibank, Inc., and Petron Corp.
There are two kinds of a corporation:
Stock corporation
The stock capital is divided into shares, which are distributed to investors. Investors will then receive the dividends and the parts of the surplus profits computed based on the number of their shares.
Non-stock corporation
A non-stock corporation doesn’t issue stock shares to its members since it exists for charitable, religious, educational, cultural, civic service, or other equivalent purposes.
Pros
- You have liability protection.
- There are specific tax exemptions for corporations.
- You get better funding.
- It ensures business continuity.
Cons
- It’s expensive to run a corporation.
- There’s a lengthy application process to attain this business structure.
- Forming and maintaining a corporation in good standing is complex and time-consuming.
- This structure requires close coordination with the Securities and Exchange Commission (SEC) and involves multiple record-keeping and accounting work.
One-person corporation
A one-person corporation (OPC) only has one stockholder who can be a natural person, trust, or estate. It combines the best aspects of a corporation and a sole proprietorship, namely limited liability and complete dominion. These typically include banks, pre-need trust and insurance companies, and non-chartered GOCs.
Pros
- You have complete control of the business, as all business decisions are at the OPC director’s sole discretion and profits.
- There’s no bond requirement for a single stockholder in OPC.
- There’s limited personal liability.
- Foreign naturals can set up an OPC subject to approval.
Cons
- This structure is limited to natural persons, trusts, or estates.
- OPC requires more complex processes and paperwork.
Factors to Consider When Selecting a Business Structure
If your new business fits into more than one type of business structure, how do you choose the best one? Focus on the following areas to decide:
Funding
While not the be-all and end-all, having enough capital to start your business can significantly impact your operations. Corporations can fund their business from investors and bank loans by selling shares or raising more money. Single proprietorship uses their credit or undertakes partners.
Control
If you want primary control over your business, consider the structure of a sole proprietorship. Partnerships bring in other people in top management, but their responsibilities can be detailed in the contract. Meanwhile, corporations need a board of directors, requiring mutual agreement regarding the division of control.
Liability
Determine how much legal responsibility you’re willing to accept when choosing a business structure. Incorporating a business means you set up a distinct identity from your company, reducing your risk for any liability. A corporation, for example, provides stronger protections for the owners, unlike the others.
Taxes
Managing taxes are a staple when running a business. Sole proprietor owners pay personal income tax, while partners claim a portion of their profits as personal income.
For other types of business structures, the Bureau of Internal Revenue (BIR) regulations need to be kept in mind, such as filing tax returns promptly and accounting for tax exemptions accordingly.
Flexibility
Assess your goals and business plan, then compare how each business structure aligns with them. Ensure that the one you pick will allow sustainable growth and not limit your brand’s potential over time.
Build Your Business with the Right Structure
The best type of business structure depends on your unique needs. Learn what product or service you want to venture into, and take the time to understand the different types of business structures in the Philippines to find the right one for you!
Once you’ve decided what to apply for, the next wise step is to find an expert, like CloudCfo, to settle all your accounting and bookkeeping needs for your business.
CloudCfo is a cloud accounting firm for startups and small-medium enterprises (SMEs) in the Philippines. We can help you build and scale your business’s finance functions. Get in touch with us today to learn more!
