Suppose you are thinking of starting a business. In that case, one of the most significant decisions you will ever make is if your operations will be a sole proprietorship, partnership, regular corporation, or a one-person corporation. A lot of elements hinge on your organizational structure, from paying taxes to dealing with liabilities.
If you fail to consider all angles of each business type, it can result in problems like facing revenue loss or being unable to take advantage of tax breaks. Each kind has its benefits and risks. It is in your best interest to be informed so you can make an educated decision. Below are the pros and cons of each:
Sole Proprietorship
As the name suggests, it means one person owns and controls the entire operations. The majority of business operations in the country are registered as sole proprietorships. The unique business name is registered through the Department of Trade and Industry (DTI). Small startups usually pick this classification because it is the most simple and affordable process of setting up a business. For those with limited capital, this may be the only option.
The main caveat of this structure is you and your business are considered the same. If your business is facing problems, they can seize your personal properties to pay for your liabilities. This is a major risk as this exposes your hard-earned assets. It may also be difficult to secure loans from financial institutions.
Pros
- Cheap
- Easy to set up and dissolve
- Full control and ownership
- Full receipt of profits
- Easy record-keeping
Cons
- A big risk of liability
- Limited capital
- Lack of continuity
- Limited size
Partnership
This form of business is somewhere in the middle of the sole proprietorship and corporation. You have to register your partnership business under the Security and Exchange Commission (SEC). Do note that some business types can only be registered this way, such as law or accounting firms.
With these structures, income is divided equally amongst the partner, unless a contract stating otherwise has been drafted between the people involved. It is common for issues to arise when partners think that one person is not putting in as much effort or investing as many resources. They deem it unfair for such a partner to get the same profit. To mitigate any future issues, you must make a fair arrangement ahead.
Do note that a primary investor is called a general partner. But in this setup, this person is the one with the main liability. The others are dubbed as limited partners who congruently possess limited liability.
Pros
- Two or more heads are better than one
- Start-up costs still low
- More capital available
- Easy to change the legal structure if circumstances change
- Income splitting
Cons
- Liability of partners for debts
- Risk of disagreement and friction
- If partners join or leave, valuation and division of assets is costly
Corporation
A corporation registered in the SEC is divided into regular with at least two people or a one-person corporation (OPC). Back in the day, the regular was the only choice. But thanks to Republic Act 11232 or the Revised Corporation Code, people can now register a corporation with only one incorporator. This is highly advantageous for solopreneurs that don’t have business partners.
OPCs have a unique structure compared to a regular one. A one-person corporation is required to have an OPC on its name. Submitting the usual corporate bylaws is not required, and the articles of incorporation will suffice. With one incorporator, the owner slash head of the company must appoint a secretary, treasurer, and other necessary officers within 15 days from the date of incorporation.
Noteworthy, most large businesses are corporations because of the many benefits. Whether regular or OPC, the primary perk is your company is considered a separate legal entity. This means the business is considered a “person” under the law. As such, you have limited liabilities, which means should your business face tough times, creditors cannot go beyond your investment in the corporation. Your personal assets remain safe.
Another major benefit of being a corporation is it is easier to acquire loans or get additional funding. For loans, you have to be vigilant in reading the fine print. Ensure it doesn’t have any stipulations that make you personally liable if you default or face future obligations. This clause will nullify the legal protection of your personal properties if you are a corporation.
Most of all, a corporation offers what is known as a perpetual term or succession. This means the existence of the corporation is not threatened if the original founders pass away. It also means that the business will continue to exist even if the directors, officers, or shareholders come and go. The corporation can go on with their daily operations without any worries because death, retirement, and insolvency of its various members will not affect the company’s life nor will these events trigger the dissolution of the company.
One caveat why most people do not choose this structure is the expense and effort you need to expend to set things up. It is also harder to maintain this legal entity. For example, retainer’s fees for accounting services are more expensive for corporations than sole proprietorships. If money is not an issue for you, this is your best bet.
Another problem with corporations is double taxation. This means your company’s income is first taxed. After this, your cash dividends to stockholders are taxed again. That being said, there are also tax advantages of being a corporation, such as bigger deductibles.
Pros
- Separation of personal assets from the company’s legal liabilities
- Can sell stock to raise capital
- Well established structure with clear roles and responsibilities
- Employees have the option to buy stock
- Easier to get funding from financial institutions
- Perpetual succession of the corporation
Cons
- The process is time-consuming with a lot of paperwork
- Very costly to set up and maintain
- Tons of regulations to comply with so little flexibility
- Double taxation
Final Word
Selecting the structure of your company is a decision you cannot take lightly. It has a massive impact on your business’s future success. The great news is should you find your chosen structure less than stellar; it is possible to change to a different structure. However, it will waste your resources like time, money, and energy. For best results, a basic understanding of these pros and cons are a must so that you can make a wise judgment. If you need help setting things up, our team will gladly help you out. Schedule a free initial consultation with us today!
