Choosing a company organization or business registration type is as crucial as the decision to start the enterprise itself. Every business organization has their respective advantages and disadvantages. In most scenarios, selecting the appropriate business organization boils down to balancing risks, access to funding or capital, regulatory compliance, and ease of management. Every organization is geared towards specific purposes and considerations. Below is an introductory discussion to guide you in selecting the appropriate company organization for your business.

Sole Proprietorship

A business owned and run by one person. Initial business registration is fulfilled by completing an online business name application with the Department of Trade and Industry (DTI). In this set-up, the owner takes on a “business name” to conduct his/her affairs. Thus, the organization or enterprise for tax, legal, and representation purposes, is deemed to be an extension of the owner’s personality.

Advantages:

• Simplified initial registration – minimal paperwork and low cost to set up. The registration is made online through the DTI business name registration platform.

• Direct control – As the sole and direct business owner, the proprietor has absolute decision-making powers. Thus, there is little risk of corporate indecision.

• Easy tax compliance – Since the proprietorship is a mere an extension of the owner’s personality, any net income derived therefrom shall be deemed as the personal income of the proprietor subject to personal income taxes. Thus, the tax filing is simplified and consolidated via the proprietor’s individual tax return.

• Complete Beneficial Ownership – All earnings derived from the business goes to the proprietor.

Disadvantages:

• Direct, full, and unlimited liability – Given that the business and its owner are deemed to be one, any liability that may arise from the conduct of business is considered the personal liability of the proprietor. Thus, the owner can be held liable to the extent of all his personal properties.

• Continuity of business – As an enterprise directly managed by the owner, the sustainability of the business is directly dependent on the capacity, personal availability, and decision-making of one person.

• Limited capital– It is harder for the proprietor to raise capital, given that he must rely on his personal financial standing. More, prospective investors may encounter legal roadblocks since they cannot own company shares or are prohibited from becoming a co-owner of an enterprise legally designed to be owned precisely by one person.

All told, proprietorship is most appropriate for small businesses with no immediate plans for expansion. It suits entrepreneurs who intend to directly manage their business and who choose to be personally involved in day-to-day operations.

Partnership

The New Civil Code of the Philippines defines a partnership as “a contract where two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.”

At its core, partnership is a contractual relationship created by the voluntary agreement among the partners. It is also a business organization expressed through the concept of mutual agency where each partner may act on behalf of the partnership. Under this concept, the partners share the risks and losses – through their respective capital contributions in the form of money, property, or industry – while also correlatively sharing the prospective profits in accordance with their partnership contract.

A key feature of partnership is its establishment as a separate juridical entity from the partners who constitute it. 

Advantages:

• Shared management responsibility & broader expertise – The task of managing, growing, operating, and marketing the business is distributed among the partners, in accordance with their will, expressed in the partnership agreement. Different partners may utilize their respective trade, skills, or expertise by managing a corresponding segment of the business.

• Separate juridical personality – As an entity separate and distinct from the partners, the partnership maintains a limited juridical existence, allowing it to own property in its name, open a bank account, sue erring parties or be sued as a separate entity.

• Limited risk – In limited partnerships, a limited or “purely capitalist partner” – one who has chosen not to participate in the management of the business – is liable only to the extent of his/her capital contribution in the event of partnership insolvency or debt. 

Disadvantages:

• Potential management conflict – As each partner could become in charge of one or another segment of the business, decision-making is distributed, which increases the possibility of conflicting business judgments.

• Possible Instability – Because a partnership is created upon the will or agreement of the partners, the death, disability, or retirement of a partner in general, has the effect of business dissolution. 

• Limited fund-raising options – A partnership is funded through the contributions of the partners. It has limited options for raising capital as it is generally prohibited from selling stocks or other forms of securities, which are usually available to corporations.

Partnerships strike a balance between ease of registration and formation on the one hand, and shared risks and benefits on the other. It is usually the best option for close-knit family businesses or professional firms such as law offices or accounting firms. 

Corporation

The Revised Corporation Code defines a corporation as “an artificial being created by operation of law, having the right of succession, and the powers, attributes, and properties expressly authorized by law or incident to its existence.”

Verily, a corporation is a legal entity that is vested with corporate existence upon government recognition under existing laws. Once a corporation is issued its Certificate of Incorporation, it becomes a juridical entity with a personality separate and distinct from its incorporators, directors, officers, and stockholders.

Under such regime, a corporation possesses the “right of succession” or the attribute of continuous existence, notwithstanding the death, insolvency, or incapacity of its incorporators, directors, officers, or stockholders. As a juridical entity, it may transact as if it is an actual person. Thus, it may lawfully enter into contracts, it can undertake the performance of obligations, own properties, maintain bank accounts, sue and sued in its name, and exercise all such similar powers.

Corporations may be established in various forms such as a stock corporation, a non-stock non-profit corporation, a closed corporation, a public corporation, or even a one-person corporation.

Advantages:

• Limited liability – As an entity with a corporate life of its own, the incorporators, directors, officers, or stockholders of a corporation are effectively insulated from any debt or liability that the corporation may incur. Save for specific instances – where the corporation was used as a vehicle of fraud or illegal activity – the veil of corporate fiction stands to shield the corporation’s owners from prosecution.

• Continuity & sustainability – A corporation continues in existence despite the personal circumstances of its owners i.e. the death or disability of a director or stockholder does not affect the existence and life of the corporation, which is generally managed by a board of directors elected by the owners/stockholders.

• Easier access to capital – Corporations can easily generate funds through the issuance of shares of stocks, in which a prospective investor becomes an equity owner of the corporation. By obtaining authority or permit from the SEC, a corporation may likewise be allowed to issue various types of capital-generating securities (e.g. preferred shares, term bonds, coupon bonds, and other debt instruments).

• Professional management – A corporation is governed primarily by a board of directors, which may include professional managers, finance practitioners, lawyers, or subject-matter experts. Said directors serve at the pleasure of their electorate e.g. the stockholders.

Disadvantages:

• Complex set up – Registration requirements are more complicated and may include documents that require the services of professionals to produce. These include articles of incorporation, by-laws, stock subscription agreement, and such other documents of legalese nature.

• Relatively costlier to maintain – The periodic and annual reportorial requirements to regulators such as the SEC and the BIR are more complex, thereby modestly raising the costs of compliance. 

• Bureaucracy – Corporations follow a set procedure for conducting meetings and in doing business. This can sometimes delay decision making or slow down the crafting and implementation of policies.

All in all, corporations offer greater flexibility and growth potential. As such, for businesses designed to expand and to increase their operations over time, corporations are preferable. As a “more regulated” form of business organization, statutes, laws, and rules offer greater clarity on what can or cannot be performed by a corporation. This greatly reduces legal risks arising from ambiguous regulations. The perceived disadvantages such as the complexity of setting up a corporation and the modestly higher costs of compliance can be addressed through the employment of an appropriate service provider or professional.