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.

Is it Time to Convert Your Sole Proprietorship to a

Corporation or LLC?
by Ann MacDonald  
Nov 2007
One of the biggest issues a small business owner must face is whether to incorporate, and if so,
when. The question is: Why it so important to form a corporation or LLC? And how do you know
which legal entity is the right type for your business? 

Many people start their businesses as sole proprietors. Often, it is because they aren't really
planning their business and just started selling a product or service. Sometimes, they don't want to
go to the effort or cost of incorporating until they know if the business is viable. Other times, they
don't feel their business is risky enough to need protection. 

Imagine you write software and distribute it as shareware—you might think that is as low risk as it
gets, right? However, imagine that you inadvertently distribute a virus that destroys data on people's
hard drives. Now you may be liable for their lost data. Selling homemade jam at a farmer's market?
Seems harmless enough until someone gets food poisoning and blames your preserves. It is
important to learn how to protect yourself from the risks faced by your business. 

So What Is a Sole Proprietorship? 

In a sole proprietorship, the owner of the business and the business are a single entity. Only one
person owns the company and instead of paying corporate taxes, the owner pays personal income
tax on any profit. This type of business has some advantages because there is less paperwork—for
example simpler tax returns—and there are fewer regulations. Make a profit? It is all yours. On the
other hand, if there are problems such as lawsuits? Those are all yours, too. 

What Is a Corporation? What Is an LLC? 

A corporation makes your business a distinct entity. In other words, it separates your business
assets from your personal assets. Worried because you are the only person in your company? That
is just fine; one person or multiple people can own a corporation. In most cases, if you are
considering incorporating your small business, you will want to investigate S corporations. These are
corporations especially designed for small businesses. S corporations are not usually required to
pay corporate taxes; instead they only pay taxes on dividend earnings. Growing fast? Want to issue
stock? A C corporation will allow you to issue stock and set up a board of directors, but you will have
to pay corporate taxes. 

An LLC, a Limited Liability Company, is a different type of business entity. Like a corporation, an
LLC offers protection for the owners' personal assets in the event of lawsuit or debt. The owners—
called members when the firm is an LLC—can collect their profits through the company without
paying corporate taxes in many states. There is also greater flexibility in how profits can be
distributed amongst the owners than in corporate structures. 

Advantages of Incorporating
Incorporating protects your personal assets by separating them from those of the business. In the
event of a company lawsuit or bankruptcy, your personal assets will not be at risk. LLCs offer similar
protections. 

So, if you are running a business that is at high risk for being sued or has risky finances and you
have personal assets you would like to protect, it is wise to form a corporation or LLC. Of course
there are some circumstances in which you can still be liable; you may also want to consider
business liability insurance. 

Corporations can also save you money in taxes. This savings can be substantial for firms that are
realizing large profits. 

Reasons to Wait

Suppose you decide you want to convert your business into a corporation or LLC. When is the best
time to do it? Generally, since a corporation protects your personal assets, the answer is "as soon as
possible." However, if it is very close to the end of the year, you might want to wait until the first of
January. Why? If your business operated as both a sole proprietorship and a corporation during the
year, you will have to file two tax returns—one for each type of business—and therefore incur
additional tax preparation costs. 

So, What's Best? 

Whether it is best to incorporate or form an LLC depends the type of business you have, the owners,
and your financial and business growth goals. An LLC is ended by the death or bankruptcy of a
member, where a corporation continues without regard to these events. If you plan to issue shares
of your business to other people, a corporation is the better choice. 

Ultimately, there is no single solution that works for every type of business. If you feel it may be
advantageous to convert your sole proprietorship to a corporation or LLC, consider all the variables
and choose the entity type that will be most to your advantage. 

 Can you convert sole proprietor to corporation? same person in both on

Wed Apr 02, 2014 3:40 pm
johndoe88800
Can you convert a sole proprietor owned by Mr. A to a corporation with Mr. A as one of the
incorporators so you do not need to close down the business? Thanks a lot for any help. 

Just want to transfer the business from sole to a corporation.

yes. that is legally permissible because it is not prohibited by law. you can convert a sole proprietor to a
corporation where Mr. A is one of the incorporators. 

You need not close down the actual operations of the business while you are retiring the sole
proprietorship business and convert the same to a corporation. But for legal intents and purposes, you
are actually closing down the sole proprietorship business. and You are creating a new business entity by
incorporating a new corporation. If you have to be strict about it, there is no actual conversion of the
sole proprietorship business because you are actually terminating the life of the sole proprietorship
business with the Business Bureau and BIR. In effect, there is no continuation of the life of the sole
proprietorship business into another entity. One has been ended and a new business entity is created .

Terminating or retiring the sole proprietorship business with the Business Bureau may be easier than
retiring your business with the BIR.  and it is cheaper to retire the sole proprietorship business with the
Business bureu than it is to retire it with the BIR.   Just ask the Business Bureau (City Hall or Municipal
Hall) what are the documentary requirements for the retirement of business with their Office.

The real problem will enter when you retire your sole proprietorship business with the BIR.   This is the
dreaded time when the taxman will wield its dreaded pen and in a single stroke, you will be assessed of
taxes which you might have  not known it ever existed.   Just consult your accountant about this matter.

Just inform me if you want me to continue and elaborate further.

What are the steps for converting from Sole Proprietorship to Corporation and how long it takes to
process? Thank you.

I repeat, hindi ho iyan conversion in simplest terms. retire ka sa sole proprietorship mo sa business
bureau at bir, at mag gawa ka ng bagong corporation where isa ka doon sa incorporator.

anong processo? pumunta ka sa city hall at magtanong ka doon anong processo para mapa retire mo
ang sole proprietorship mo na business permit . pumunta ka din sa bir. magtanong ka doon papaano.
magtanong ka din doon kung ilan months makuha. ang business permit iretire, madali lang. ilang weeks
lang. ang bir registration, I retire, mga 2-3 months depende iyan if ipa audit pa ng Taxpayer's Service
SEction Chief ang business mo. option nila iyan lalo na if me makikita na me tax potential ka like di ka
nagbabayad ng tamang buwis.

while ginagawa mo iyan, pumunta ka din sa SEC. itanong mo papaano mag gawa ng corporation. it is as
simple as magawa ka ng bagong corporation. Huwag ka lang magkamaling magtanong ng papaano ba
iconvert ang sole proprietorship to corporation? kasi baka mali ang ibibigay nila na sagot sa iyo.

you better ask SEC for further info. it will take you just 30-45 days. just prepare your articles of
incorporation and your by-laws. of course, visit their websites, it will give you the list of requiremetns.
http://taxacctgcenter.org/5-advantages-of-corporation-over-sole-proprietorship/

http://mpm.ph/how-to-register-a-corporation/

http://taxacctgcenter.org/basic-corporate-income-taxation-in-philippines/