HOW TO CHOOSE BUSINESS STRUCTURE

Be A Sole Proprietorship, Partnership Or Corporation?

For most entrepreneurs, one of the most important decisions is whether to be

a sole proprietorship, a partnership or a corporation. A mistake in form of
organization can bring long-term damage to a business. Despite the risks, most
people make this decision without a good idea of the type that is really best for
their company.

Usually, we rely on our accountant or some other person who we believe is

knowledgeable in making this decision. While most of the time their advice may
have been correct, it would be better if you yourself understand what is best for
the company you are planning to put up. Below are tips on the advantages and
disadvantages of each type of organization:
SOLE PROPRIETORSHIP

This is when only one person owns and controls the business. It is the most
simple and inexpensive alternative. If you have very limited capital, then this
may be your only option. It is also very fast to put up. The large majority of
businesses in the Philippines are sole proprietorships. The main problem here
is that you and the business are legally the same, and this means that your
company’s liabilities are also your personal obligations, exposing you to great
risks.

There are many cases where a business is formed as a sole proprietorship even
though it is not really so. The most common example is the case of married
couples. When a husband and wife form a company, it should, at least, be a
partnership since there are two of them. A partnership allows two or more
persons. Many couples think having the business in the name of only one of
them does not matter if everything is conjugal property anyway. To be on the
safe side, consult an expert on all the possible consequences of this
arrangement.

PARTNERSHIP

Midway between the sole proprietorship and corporation is the partnership

form of business. Partnerships are registered in the Securities and Exchange
Commission. Some types of business must be partnerships. Some types of
professional practices, like law and accounting, can only be organized as
partnerships.

A partnership’s income is equally divided among the partners, unless there is a

written provision that dictates otherwise. Frequently, there are quarrels
because there are partners that think their partner is not putting in the same
amount of effort or investment and still get the same profit. Decide on a fair
arrangement beforehand.

If you are the main investor, and the one personally liable, this position is called
the general partner. The others are called limited partners because they have
only limited liability, as if they were shareholders in a corporation.

CORPORATION

A corporation is considered a separate entity; an artificial person created by

law and, like partnerships, is registered in the Securities and Exchange
Commission. It takes at least five persons to form a corporation in the
Philippines. There are many advantages if you are a corporation, and thus
almost all large companies are corporations because of these. Also, there are
some businesses that by law must be organized as a corporation, like a lending
company for example.

The main deterrent in choosing a corporation is the much larger amount of

expenses and effort required in setting up and maintaining this type of legal
entity. If the expense is not a problem, a corporation is quite probably the best
option.
The most often cited advantage of corporations is limited liability. That is, in
normal circumstances, you will not be liable beyond your investment in the
corporation. This is quite understandable since operating a business always has
some risks and you would want your personal assets to be free from creditors
in case your business goes bankrupt. However, this is not entirely accurate. If
you have unpaid subscribed shares, then you are still liable for the unpaid
balance of the stock. You can have fully paid shares so that you will not be
surprised by this. There are also some other situations where you may be
personally liable.

One of the greatest advantages of a corporation is that it is relatively easier to

get additional capital for it. Note, however, that in applying for a loan for your
business, there is often fine print that makes you personally liable for unpaid
obligations. Try to avoid this provision, if possible, as it nullifies the legal
protection of your personal assets if your company is a corporation.

Perhaps the most serious disadvantage of corporations is that there is double

taxation. The company’s income is first taxed, and then cash dividends to
stockholders are once again taxed. However, in practice there are also tax
advantages in being a corporation.
Choosing the appropriate legal structure for your company has a profound
impact on its eventual success, so do not take this decision lightly. The good
news about this is that, should you find the status quo not ideal, it is possible to
change to a different form of business structure. But you can only make a wise
judgement on this crucial matter if you have a basic understanding of the
advantages and disadvantages of the options.

Sole proprietorship – advantages and disadvantages

Consider operating as a sole trader if your business is small and capital
investment is minimal.

Advantages of sole trading include that: (NOT IN THE SLIDE ASK STUDENTS)
• you’re the boss
• you keep all the profits
• start-up costs are low
 • you have maximum privacy
• establishing and operating your business is simple
• it’s easy to change your legal structure later if circumstances change you
can easily wind up your business.

Disadvantages of sole trading include that:

• you have unlimited liability for debts as there’s no legal distinction between
private and business assets
• your capacity to raise capital is limited
• all the responsibility for making day-to-day business decisions is yours
• retaining high-caliber employees can be difficult
• it can be hard to take holidays
• you’re taxed as a single person the life of the business is limited.
Starting a small business can be an intimidating process: You need to come up
with a business strategy, solicit customers, and manage short- and long-term
finances. Plus, sorting through the paperwork, forms, and registration steps to
legally set up your business can be even more frustrating. This being said, if
you’re still trying to determine which business entity type is best for you, you
might be interested in the advantages of sole proprietorship.

Although this structure won’t be right for every business, there are numerous
benefits of sole proprietorship for many entrepreneurs. This type of business
entity is easy to set up, is straightforward, and requires fewer procedural steps
than other entities like corporations. In particular, one-person companies
benefit specifically from the advantages of sole proprietorship—especially if
their business doesn’t require a complex legal or financial setup.
With this in mind, however, there are both advantages and disadvantages of
sole proprietorship—so it’s important to know when the benefits are
overshadowed by their limitations, particularly with regard to personal
liability.

In this guide, therefore, we’ll break down the advantages of sole proprietorship
(as well as the disadvantages) so that you have all the information you need to
decide if this entity type is right for your business.

What Are the Advantages of a Sole Proprietorship?

So, with this overview in mind, let’s answer our target question: What are the
advantages of a sole proprietorship?
5 Advantages of Sole Proprietorship
1. Less paperwork to get started.
2. Easier processes and fewer requirements for business taxes.
3. Fewer registration fees.
4. More straightforward banking.
5. Simplified business ownership.

Ultimately, there’s a reason that most small register as sole proprietorships: it’s
easy, quick, and straightforward. The majority of small companies don’t need to
bother with the requirements that come with other business entity types. After
all, it’d be a significant amount of work to form a board of directors if you run a
one-person hot dog stand, and you wouldn’t benefit from forming a C-
corporation if you’re a freelance writer—since it wouldn’t make sense to file
business and personal taxes separately.
All of this being said then, let’s break down the five major advantages of sole
proprietorship:

1. Less Paperwork
The advantages of sole proprietorship are vast and varied—especially if
your company’s small. One of the first and most basic advantages, however,
is that you won’t have to fill out a ton of paperwork with this business entity
type.

It’s important to note, however, that you may have to obtain a business
license or permit the local government under your jurisdiction.
Nevertheless, one of the initial benefits of sole proprietorship is that this
structure allows you to scale up your business much more quickly, and with
less government paperworks.
2. Easier Tax Setup

Another one of the biggest advantages of sole proprietorship is the much

simpler and straightforward tax requirements, especially compared to
other entity types.

First, whereas other business structures need to apply for tax

identification number (TIN) if don’t have one, with the Bureau of Internal
Revenue (BIR).

3. Fewer Business Fees

When you’re starting and first running a business, your budget can be tight.
Therefore, another one of the crucial advantages of sole proprietorship is
the ability to save on registration fees.
4. Straightforward Banking
One of the next significant advantages of sole proprietorship is simplified
banking. Sole proprietorships are the only kind of business entity that
doesn’t require a business checking account in order to operate a
company.

As a sole proprietorship, you can make and accept business payments

straight from your own personal bank accounts. You don’t have to go
through the process of finding a business checking account—although if
you want to separate your personal and business finances in this way, you
have the option to do that as well.

5. Simplified Business Ownership

Sole proprietorships make it easy to start a business, for sure.
 This being said, you don’t have to worry about boards, officers, or any of the
other positions typically required by other business structures—meaning
you can focus on your daily operations and long-term goals without having
to involve other stakeholders or deal with managing external personnel to
keep your company on the right side of state and local registration.

What Are the Disadvantages of Sole Proprietorship?

Here are some of the top disadvantages of sole proprietorship to consider:

3 Disadvantages of Sole Proprietorship

1. No liability protection.
2. It’s harder to get financing and business credit.
3. It’s harder to sell your business.
1. No Liability Protection
BIR can confiscate your properties if in case you incur taxes liability with the
government.

2. Harder to Get Financing and Business Credit

Another disadvantage of sole proprietorship is that it can be harder to
secure loans or financing than it is for other business entities. Essentially,
this is because most banks want to work with established companies—and
not just because they’re typically larger in terms of revenue—but also
because they tend to have a more substantial history with credit.

It’s more difficult for sole proprietors to build business credit the same way
that other companies can, since they often don’t have their own business
credit cards and business bank accounts. Plus, since all of the liability and
 backing from a sole proprietorship comes from a single owner, the business
as a whole is reliant on that individual’s initial investments, finances, and
credit history.

This being said, although as a sole proprietor, you may not be able to
secure business financing from conventional lenders, you can still seek out
personal loans to help fund your business. However, this option also comes
with its own pitfalls, since you won’t have the same level of protection as
you would if your business couldn’t pay back its debts.

3. It’s Harder to Sell Your Business

Since a sole proprietorship is attached to an individual by nature, it’s all but
impossible to sell or hand down your business to someone else. Therefore,
your business ends in the event of your death, or if you decide that you no
longer want to run the company.
It’s not impossible to sell a sole proprietorship, however. This being said
though, you do need to go about selling your business in a different way.
Instead of selling your business as a whole, with everything it entails, you’d
have to sell your business assets, rather than the company itself.

In this case, the buyer won’t be able to keep your business name, unless
you’ve established a DBA (“doing business as”) and either sell or transfer the
usage rights to the other party. If you wanted to pass your business down to
an inheritor, you’d have to go through this same process.

Therefore, although one of the advantages of sole proprietorship is singular

ownership and control, this can also be a disadvantage, as it makes it much
more complicated to sell your business if you eventually decide you want
to do so.
Frequently Asked Questions:

1. What does sole proprietor mean?

A sole proprietor is the sole owner of an unincorporated business. This
means that there is no legal distinction between the owner and his or her
business.

2. Can a sole proprietor have employees?

Sole proprietors can hire employees so long as they have an EIN from the
IRS.

3. Does a sole proprietor need an TIN?

A sole proprietor can use his or her existing TIN.
The Bottom Line
So, as you can see, when it comes to the advantages and disadvantages of sole
proprietorship, many of the best benefits can also be the top drawbacks, it all
depends on what will work for your business. To recap then, if you’re trying to
decide if sole proprietorship is right for you, here’s what you have to
consider:
• Do you want to set up your business quickly and easily, with less paperwork
and registration fees?
• Do you want to have everything related to your business attached to you, as
an individual, and under your control?
• Do you not want to worry about other partners, investors, or even
government regulations having a hand in your business?
If your answer to these questions is an overwhelming, “yes,” than the
advantages of sole proprietorship likely outweigh the disadvantages. However,
before you make a final decision, it’s always worth considering what the other
entity types have to offer—and even consulting with a lawyer or online legal
service for professional advice.
https://www.fundera.com/blog/advantages-of-sole-proprietorship

Comparison between sole and corporation

https://taxacctgcenter.ph/5-advantages-of-corporation-over-sole-
proprietorship/
How do I register a Sole Proprietorship Business?
It’s easy to set up a Sole Proprietorship in the Philippines (at least as compared
to a Corporation or a Partnership). To set up a Sole Proprietorship in the
Philippines, it requires going to 3 government agencies: DTI, LGU or Municipal
Hall and Barangay and the Revenue District Office of BIR in the city of your
business address. Note that you are not COMPLETELY REGISTERED as a Sole
Proprietorship if you do not have documents from these three departments.

Can I employ other people because my business is sole

https://www.taxumo.com/blog/the-advantages-of-being-a-sole-proprietor-in-
the-philippines-tax-tips-tuesdays-ep-1/
PARTNERSHIP

Partnerships Defined and Explained

A partnership is an agreement between two or more people to finance and
operate a business.

Partnerships, unlike sole proprietorships, are entities legally separate from the
partners themselves. In a general partnership, however, profits and losses flow
through to the partners’ tax returns.

Each general partner has equal responsibility and authority to run the business.
Each partner should be involved in day-to-day operations of the business, and
should make management decisions.
Any partner may represent the business without the knowledge of the other
partners—the actions of one partner can bind the entire partnership. If one
partner signs a contract on behalf of the partnership, the general partnership
and each partner are responsible for that contract. The shared ownership
concept that characterizes a business partnership gives it certain distinct
advantages and disadvantages.

Partnerships are relatively easy to establish; however time should be invested

in developing the partnership agreement. In a partnership agreement, the
following arrangements, among others, should be spelled out:
1. How the business will be financed.
2. Who will do what work.
3. What happens if a partner dies.
4. What happens if one or both partners want to dissolve the partnership.
It is strongly recommended that an impartial attorney be contacted to write the
partnership agreement.

Business Partnership Advantages

Partnerships are relatively easy to establish.

• With more than one owner, the ability to raise funds may be increased,
both because two or more partners may be able to contribute more funds
and because their borrowing capacity may be greater.
• Prospective employees may be attracted to the business if given the
incentive to become a partner.
• A partnership may benefit from the combination of complementary skills
of two or more people. There is a wider pool of knowledge, skills and
contacts.
 • Partnerships can be cost-effective as each partner specializes in certain
aspects of their business.
• Partnerships provide moral support and will allow for more creative
brainstorming.

Business Partnership Disadvantages

Business partners are jointly and individually liable for the actions of the other
partners.
• Profits must be shared with others. You have to decide on how you value
each other’s time and skills. What happens if one partner can put in less
time due to personal circumstances?
• Since decisions are shared, disagreements can occur. A partnership is for
the long term, and expectations and situations can change, which can lead
to dramatic and traumatic split ups.
• The partnership may have a limited life; it may end upon the withdrawal or
death of a partner.
• A partnership usually has limitations that keep it from becoming a large
business.
• You have to consult your partner and negotiate more as you cannot make
decisions by yourself. You therefore need to be more flexible.
• A major disadvantage of a partnership is unlimited liability. General
partners are liable without limit for all debts contracted and errors made
by the partnership. For example, if you own only 1 percent of the
partnership and the business fails, you will be called upon to pay 1 percent
of the bills and the other partners will be assessed their 99 percent.
However, if your partners cannot pay, you may be called upon to pay all
the debts even if you must sell off all your possessions to do so. This makes
partnerships too risky for most situations. The answer would be a
different business structure.
If you Decide on a Business Partnership…
…you should create a “business prenup” that will protect a business if someone
leaves.
This “business prenup” should spell out what will happen to your company if a
co-owner:
• Wants out of the business
• Wants to retire
• Goes through personal bankruptcy
• Wants to sell his shares to someone else
• Goes through a divorce
• Passes away

https://startingyourbusiness.com/advantages-and-disadvantages-of-a-
partnership/
Advantages and Disadvantages of Partnership
A partnership is commonly formed where two or more people wish to come
to together to form a business. Perhaps they have a common business idea
that they wish to put to the test or have realized that their skills and talents
compliment each others in such a way that they might make a good business
team. Forming a partnership seems like the most logical option and, in some
cases, it is. Running a small business with a reasonably low turnover, a
partnership is quite often a good choice of legal structure for a new business.
The way a partnership is set up and run as well as the way it is governed and
taxed often make it the most appealing form of business. However, there are
circumstances where this isn’t the case.

Being a partnership, the business owners necessarily share the profits, the
liabilities and the decision making. This is one of the advantages of
partnership, especially where the partners have different skills and can work
well together. However, it can obviously present some problems. Over the
years, many partnerships have turned sour. Family and friends go into
business together and end up falling out on a personal or business level and
it all ends badly. This is one of the major disadvantages of partnerships over
other business models, but it’s important to be able to balance the
advantages and disadvantages.

Advantages of Partnership

• Capital – Due to the nature of the business, the partners will fund the
business with start-up capital. This means that the more partners there
are, the more money they can put into the business, which will allow
better flexibility and more potential for growth. It also means more
potential profit, which will be equally shared between the partners.
• Flexibility – A partnership is generally easier to form, manage and run.
They are less strictly regulated than companies, in terms of the laws
governing the formation and because the partners have the only say in
the way the business is run (without interference by shareholders) they
are far more flexible in terms of management, as long as all the partners
can agree.

• Shared Responsibility – Partners can share the responsibility of the

running of the business. This will allow them to make the most of their
abilities. Rather than splitting the management and taking an equal share
of each business task, they might well split the work according to their
skills. So if one partner is good with figures, they might deal with the book
keeping and accounts, while the other partner might have a flare for sales
and therefore be the main sales person for the business.
 • Decision Making – Partners share the decision making and can help each
other out when they need to. More partners means more brains that can
be picked for business ideas and for the solving of problems that the
business encounters.

Disadvantages of Partnership
• Disagreements – One of the most obvious disadvantages of partnership
is the danger of disagreements between the partners. Obviously people
are likely to have different ideas on how the business should be run, who
should be doing what and what the best interests of the business are. This
can lead to disagreements and disputes which might not only harm the
business, but also the relationship of those involved. This is why it is
always advisable to draft a deed of partnership during the formation
period to ensure that everyone is aware of what procedures will be in
 place in case of disagreement and what will happen if the partnership is
dissolved.

• Agreement – Because the partnership is jointly run, it is necessary that

all the partners agree with things that are being done. This means that in
some circumstances there are less freedoms with regards to the
management of the business. Especially compared to sole traders.
However, there is still more flexibility than with limited companies where
the directors must bow to the will of the members (shareholders).

• Liability – Ordinary Partnerships are subject to unlimited liability, which

means that each of the partners shares the liability and financial risks of
the business. Which can be off putting for some people. This can be
countered by the formation of a limited liability partnership, which
benefits from the advantages of limited liability granted to limited
 companies, while still taking advantage of the flexibility of the
partnership model.

• Taxation – One of the major disadvantages of partnership, taxation laws

mean that partners must pay tax in the same way as sole traders, each
submitting a Self-Assessment tax return each year. They are also
required to register as self-employed with HM Revenue & Customs. The
current laws mean that if the partnership (and the partners) bring in more
than a certain level, then they are subject to greater levels of personal
taxation than they would be in a limited company. This means that in most
cases setting up a limited company would be more beneficial as the
taxation laws are more favorable (see our article on the Advantages and
Disadvantages of a Limited Company).
 • Profit Sharing – Partners share the profits equally. This can lead to
inconsistency where one or more partners aren’t putting a fair share of
effort into the running or management of the business, but still reaping
the rewards.

https://www.thecompanywarehouse.co.uk/blog/advantages-and-
disadvantages-of-partnership

CORPORATION

Advantages and Disadvantages of Corporations

To better understand the advantages and disadvantages of corporations, let’s

understand it with the help of an example. Meet Sam. He is the owner of a retail
chain that has started to grow rapidly. To take advantage of the growth
however, he needs more money to support the business. He is also getting
more concerned about liabilities in case something goes wrong without his
personal fault in such a large business. Considering his case, Tom, a very
learned friend, and advisor of Sam advised him to convert his business into
a corporation.

A corporation is a business organization that is distinct from its

owners. Shareholders are the owners of a corporation. Shareholders, however,
do not run the corporation. They appoint the Board of Directors who oversee
the corporation’s activities. These Board of Directors appoint the officers of
the corporation to run the day to day operations. Board of Directors appoints
the CEO, CFO, and the COO among other Chief Executives of the corporation.
Corporations enjoy most of the rights and responsibilities that an individual
has: they can enter into contracts, take a loan, sue, and be sued, own assets, pay
taxes, hire employees, etc. Some refer to a corporation as a ‘legal person’.

In a corporation form of business organization, it is relatively easy to raise huge

sums of capital through the public. Since the total money a company wishes to
raise is divided into thousands and lakhs of shares, the price of each share
comes out to be very small. A small price allows a number of people to purchase
the shares of the company. Hence, it becomes easy to raise a big amount for a
corporation by dividing it into smaller units.

Corporations have Perpetual Existence

Another advantage of a corporation is that they continue to exist beyond the

deaths of the Board of Directors, the executives, and the managers. Its life can
come to an end only when the Board of Directors and the Executive team
decide to do so. Hence, investors don’t have to worry about an unexpected
death or illness of the executives and managers, somebody else will come and
take their place. This also allows the managers to plan for the long term and do
better.

Easy Transfer of Ownership

Ownership in a corporation is typically easy to transfer. In the case of a public
company, the shares (instruments of ownership) are freely transferrable. In the
case of a private company however, it is comparatively difficult to transfer
shares as there are some restrictions.
Builds Credibility
A corporate form of business organization is considered more stable than
other forms of business organization. Also, when you set-up a corporation, you
can attract top talent in the market to grow your business rapidly. Hence, a
corporation conveys the credibility of your business to suppliers, customers
are other stakeholders of the business.
Disadvantages of Corporations

There are certain disadvantages of setting up a corporation that Sam must

consider before getting into it.

Complex Process
Setting up a corporation is a very complex process. It takes heavy paperwork to
set up a corporate. The owners have to take lots of permissions from different
regulatory authorities. Also, many norms of different regulatory bodies that a
corporate must fulfill before it can start its business. For e.g., Sam will have to
ensure that his business meets all the criteria set by stock exchanges if he
wishes to list his business on. All this takes a long time to conclude which may
demotivate the founders.
Double Tax
Till now, all the profits made by Sam’s business were his income and so he had
to pay only a single tax on his income. But, as Sam comes to know, the owners
and the promoters of a corporation are taxed two times on their income. Firstly,
the corporation has to pay a flat Corporate Tax on its profits. And then the
dividends received by the shareholders are taxed in their hands. This makes it
less attractive for business owners to set up a corporation.

Conflict of Interests
If Mr. Boy converts his business into a corporate, he will end up giving the
decision-making power in the hands of the Board of Directors and the
appointed officers. Sometimes, it happens that the Board of Directors and the
executives may fulfill their personal interests by taking certain decisions. These
decisions may not be good for the health of the corporation. For e.g., they may
decide to pay themselves higher salaries out of the profits, or, they may
purchase luxury offices for them with expensive facilities, etc. All these types of
personally beneficial decisions may harm the corporate and its image
especially if the corporate is not making good profits.

Corporations Lack Business Confidentiality

After setting up a corporation, Sam will lose the confidentiality of his business.
As part of the federal rules and regulations, a corporation must provide
shareholders with an annual report and various other reports. These reports
present data on sales volume, new assets, profits, debts, and many other
qualitative as well as quantitative information. Since these reports are available
for the general public, Sam may end up disclosing his business strategies to his
competitors.
Extensive Rules to Follow
There are many standards set by law on how corporations should govern
themselves. For e.g., corporations must have a Board of Directors, hold
meetings at regular intervals, keep certain records and publish some
documents and reports periodically. A small mistake of manipulation by any of
the top executives could penalize the corporate heavily. For e.g., if the accounts
department forgets to disclose a liability say, bank loan, the federal
government may consider it as a fraud and penalize the corporate. Due to this,
the corporate may gain a bad image and its valuation in the stock market may
go down. Hence, Sam may get punished for something which was not under his
proper control.1–4