SINCE the one-person corporation (OPC) was introduced in the Philippines last 2019 through Republic Act 11232, many entrepreneurs and freelancers have been confused about the differences between a sole proprietor and an OPC, not knowing which one is right for them. Starting a business in the Philippines is already daunting. The potential costs, should one choose wrong, can be costly. Here, we explore the differences between these two business structures and their advantages and disadvantages.
To start, we need to define these two entities. A sole proprietorship is a business owned and operated by one person. This means one person has complete control over all decision-making regarding the business. On the other hand, OPC is a business structure that allows a single person to incorporate a company as a separate legal entity. This means the corporation is separate from the owner and can enter into contracts, own assets and incur liabilities in its name. The owner of the OPC is called a “single stockholder,” and is the corporation’s sole owner.
Regarding the pros and cons, we can summarize them under three categories — management, accountability and taxes.
Management. It’s faster and easier to set up and manage a sole proprietor versus an OPC. The legal and capital requirements are minimal for sole proprietors and are not required to have annual reports or meetings.
Accountability. Sole proprietors have complete responsibility for their business. That means they have full decision-making and are entitled to all profits the business generates. However, sole proprietors are also liable for all debts and obligations. Since only one person has full control, raising capital from outside investors may be more complex, and it can be challenging for the business to expand. On the other hand, OPC is a legal entity separate from its sole stockholder, so it is easier for the corporation to enter into legal contracts, invite investors and expand. In addition, it can continue to function even when the founder is no longer with the company for whatever reason, with its nominee and alternate nominee who were appointed upon incorporation to manage the business operations in the absence of the sole stockholder.
Taxes. The taxes per entity do vary. Generally, sole proprietors are subject to graduated tax rates from zero to 35 percent with an exemption should its taxable income fall below P250,000.00 per year. They also have the option to avail of the 8-percent tax rate if revenue does not exceed P3 million. OPCs have a corporate tax rate of 20 to 25 percent, depending on its assets and taxable income for the year. Both entities can deduct certain business-related expenses.
Deciding on the business structure to adopt is a critical decision that can significantly impact the business’s operations, tax obligations and growth potential. Both sole proprietorship and one-person corporation have their advantages and disadvantages. In case one is still unsure, many businesses such as Permitly.ph give guidance through free consultations to help narrow down the right entity. Ultimately, choosing a business structure will depend on your business goals, risk tolerance and financial situation.
Georgianna Carlos is a serial entrepreneur managing many brands. One of them is Permitly Philippines which helps freelancers, entrepreneurs and professionals register their businesses, and fulfill other business requirements such as SSS, Philhealth, and others.