After deciding to start a business (and the particular business to pursue), one of the important issues is the form of business entity that will serve as the vehicle in pursuing the business. You may say that the next important issue is the source of funding, which is correct, but that issue will be discussed much later. Right now, let’s focus on the forms of business.
The choice of the form of business or business organization depends on various factors. In certain business, like banks, the law requires that the business entity must be a corporation. A small business, like your friendly sari-sari store, is better off as a sole proprietorship, although it could also be converted to another form of business if the circumstances require that shift.
Sole proprietorship
Also referred to as “single proprietorship,” a sole proprietorship is the most simple form of business and the easiest to register, through the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (DTI). It is owned by an individual who has full control/authority of its own and owns all the assets, as well as personally answers all liabilities or losses. The fact that it is run by the individual means that it is highly flexible and the owner retains absolute control over it.
The problem, however, is that a sole proprietor has unlimited liability. Creditors may proceed not only against the assets and property of the business, but also after the personal properties of the owner. In other words, the law basically treats the business and the owner as one and the same. This uniform treatment also has important tax implications. Partnerships and corporations may lessen their tax liability through a myriad of business expenses and other tax avoidance techniques. These tax deductions may not be applicable to a sole proprietorship. Also, the potential growth and reach of a sole proprietorship pale in comparison with that of a corporation.
Partnership
A partnership consists of two or more persons who bind themselves to contribute money or industry to a common fund, with the intention of dividing the profits among themselves. The most common example of partnerships are professional partnerships, like in the case of law firms and accounting firms. Just like a corporation, it is registered with the Securities and Exchange Commission (SEC).
A partnership, just like a corporation, is a juridical entity, which means that it has a personality distinct and separate from that of its members. A partnership may be general or limited. In a general partnership, the partners have unlimited liability for the debts and obligation of the partnership, pretty much like a sole proprietorship. In a limited partnership, one or more general partners have unlimited liability and the limited partners have liability only up to the amount of their capital contributions. Unlike a corporation, which survives even when a member/stockholder dies or gets out, a partnership is dissolved upon the death of a partner or whenever a partner bolts out.
Corporation
A corporation is a juridical entity established under the Corporation Code and registered with the SEC. It must be created by or composed of at least 5 natural persons (up to a maximum of 15), technically called “incorporators.” Juridical persons, like other corporations or partnerships, cannot be incorporators, although they may subsequenly purchase shares and become corporate shareholders/stockholders.
The liability of the shareholders of a corporation is limited to the amount of their capital contribution. In other words, personal assets of stockholders cannot generally be attached to satisfy the corporation’s liabilities, although the responsible members may be held personally liable in certain cases. For instance, the incorporators may be held liable when the doctrine of piercing the corporate veil is applied. The responsible officers may also be held soliarily liable with the corporation in certain labor cases, particularly in cases of illegal dismissal.
The biggest businesses take the form of corporations, a testament to the effectiveness of this business organization. A corporation, however, is relatively more difficult to create, organize and manage. There are more reportorial requirements with the SEC. Unless you own sufficient number of shares to control the corporation, you’ll most likely be left with no participation in the management. The impact of these concerns, however, is minimized by the army of lawyers, accountants and consultants that assist the corporation’s management.
*Originally posted at the Pinoy Entrepreneurs blog.
I have a question, which I hope someone from here can answer. What’s the law that requires accounting firms to change their firm name whenever no more partner, whose name was previously included in the firm name, are affiliated or working in the firm (meaning, retired or deceased).
Moreover, why is it that accounting firms in the Philippines cannot change their firm name to their international affiliates, just like in the case of MDAC (formerly CLMC) to Deloitte, SGV & Co. to Ernst & Young, etc? What’s the difference between the Philippine Law and other laws in Southeast Asia regarding partnership names. Note: Deloitte-Singapore is “Deloitte-Singapore” in Singapore, not just any Chinese partners’ names.
Thanks,
Jorelle
A,B,C,D,E decided to incorporate their business. A owns 70%, B 15% and the rest 5% each. A and B are co-signatories to the corporate bank account. A wants to be sole signatory as B refuses to affix his signature to any check. Company payables are mounting. C,D, and E can no longer be found.
Can A unilaterally declare via a board resolution that he alone is the new company signatory? Can he do it without notifying B?
Assuming the bank accepts the board resolution, can B sue A and the bank? What are their liabilities, if any?
ramonsd
just wanna ask about this. my mother is a PO guarantor of Gaisano Malls, and I was wondering if she needs to get a business permit for that. and what type of business does that fall under?
hi sir/maam, im from bacolod…Im just wondering what are the requirements for a sole proprietorship convert to a partnership? And estimate How long will it take to process the partnership? I understand that Securities and Exchange Commission (SEC) nearest to Bacolod is in Iloilo City… Thanks 🙂
sir/madam
hope you can help me with this matter
my business trade name is university snack bar, now does it mean that i may only sell snack products such as biscuits, drinks, burger and the like? or do i have an authority to add other product such as school supplies…?my business permit is registered already as general merchandise…
thanks and God bless
What is the requirement of changing from partnership to single proprietorship? What hould i do first? go to the BIR? or to SEC first? Please help …. thanks in advance?
Good evening mam and sir,
Question lang po sna at sana matulungan nyo po ako. Pumasok po kasi ako s isang business partnership. Ang kapartner ko po ay meron ng existing carinderia business. Niyaya nya po ako mag invest sa knya at nangako po siya na dadagdagn po nya ng egg business para mas malaki ang kita. May kontrata po kmi. Pero mkalipas po ang isang buwan wla p rin pong egg business at nagpa alaman ko n marami po siyang utang. Umamin po siya s akin n nagastos n po nya ang pera dahil pambayad utang at umamin din po cia n kya nya ako kinunvince magbusiness at nid nya po ng assistance dahil nga po s utang pero d nya po yan sinabi nung unang nagbigay po cia ng business proposal sakin. napagconnect connect ko n po, kaya po d matuloy ang egg dealing business po namin ay dahil wla n po pondo. Ano po pede ko gawin para makuha ko po ang 200k ko n pera s knya dahil buhat ng malaman ko po lahat ayaw ko n po ituloy ang negosyo dahil wla n po ako tiwala s knya. Sna matulungan nyo po ako. Thanks
How do you call a Stockholder/Incorporator who gets his shares of stocks as payment for his knowlege? Where in Corporation Code can I find it? Thanks!
What is the difference in VAT payments between a manpower agency doing business as service contractor and an events and promotions company? Where do we apply the VAT? Is it true that like Advertising companies, application of VAT is on the Agency Service Fee only?