Being an entrepreneur can be both exciting and daunting at the same time. For those just starting, one may wonder: how does one start?
The first step is to register your business. This allows entrepreneurs to make various transactions with institutions, raise funds, and even boost your image and relationship with customers. In the Philippines, one can choose from 3 types of businesses: sole proprietorship, partnership, and corporation.
Not sure of which one to choose? Here are the pros and cons of each one.
Sole Proprietorship
What: The most basic type of business. This is owned, managed, and controlled by only one individual.
Choose This When: You are launching a side hustle or want to implement or test an idea right away and you don’t have any partners.
Pros
- Fast and easy to register.
- Low capital easy to register.
- Minimal requirements needed.
- Enterpreneur has full control of the business.
- All profits go to the enterpreneur.
Cons
- The entrepreneur and business are not separate entities, thus, the owner is responsible for all liabilities, losses, taxes, potential lawsuits, and debts.
- The business can’t raise funding as there are no shares available to exchange with investors.
- Burnout as your business grows as only the entrepreneur is managing it.
Partnership
What: A type of business between two or more individuals are co-owners of said business. This is just like sole proprietorship where the business and individuals are not separate entities- only this time, responsibilities are spread out to all the partners.
Choose This When: When you and a friend/s want to start a side hustle or test an idea together.
Pros:
- Fast and easy to set up.
- Low capital requirement.
- Minimal requirements needed.
- Shared workload, which leads to more collaborative efforts.
- Easy to manage and immediate decision making process.
- All profits go directly to the partners.
Cons:
- Conflict between the partners can negatively affect the life cycle of the business. Also, the decision of one partner affects the other partners (ex. Partner A buys expensive machinery for the business. The other partners are also liable to pay off the purchase).
- All partners are responsible for all liabilities, losses, potential lawsuits, and debts.
- Since profits go directly to the partners, their personal income tax returns will be affected – which they are also responsible for.
- If one of the partners withdraws, retires, or dies, the business dissolves.
Corporation
What: A type of business that is a separate entity from the entrepreneur/s and other stakeholders
Choose This When: You are setting up a business with the goal of scaling said company
Pros:
- Limited liabilities. Should accidents, debts, or losses occur, the personal assets of stakeholders will not be used or affected (considering the stakeholder follows the laws and has not done something negligent).
- Perpetual existence, which means, should the founders pass away or retire, the business can continue to operate as long as the stockholders choose to do so.
- It is only through a corporation that stocks can be sold or given to, allowing them to own part of the business. Also, distributing stocks does not remove control from the entrepreneur.
- Possible to raise funds from investors as there are stock options to give in exchange.
- Having a corporation sounds more credible to others.
Cons:
- Larger capital requirement to set up a corporation.
- A corporation takes time to set-up.
- Have more requirements and compliances to set-up and operate.
- More taxes to file, as this is separate from personal income tax.
Hopefully this summary was able to shed some light on the different business options you can choose from as an entrepreneur.
Sources:
ReferenceforBusiness.com
LegalZoom.com
AllBusiness.com
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