Kenneth John Bohol

FOUR FORMS OF BUSINESS OWNERSHIP IN THE

PHILIPPINES

1. Sole Proprietorship
A sole proprietorship is the simplest and most common structure chosen to start a business. It
is an unincorporated business owned and run by one individual with no distinction between
the business and you, the owner. Sole Proprietorship examples include small businesses, such as
a single person art studio, a local grocery, or an IT consultation service. The moment you start
offering goods and services to others, you form a Sole Proprietorship. It's that simple. Legally,
there is no distinction between you and your business
A sole proprietorship has only one individual that owns all assets and liabilities of the business.
The business does not own assets in the corporate structure because they are all considered the
property of the owner of the sole proprietorship. In a sole proprietorship, no documents need to
be filed. The only requirement is to comply with taxation laws at the federal, state, and local
levels. Of course, this makes them the easiest business type to form.
If the owner is disabled, retires, or dies it terminates the sole proprietorship. Continuation of the
business by another individual requires a new sole proprietorship. There are no annual reporting
requirements for a sole proprietorship. Due to its ease of formation, the sole proprietorship is
very popular.
Sole proprietorships have their own advantages and disadvantages as well.
It is considered one of the easiest and least costly business types thanks to the absence of filing
fees and the need for formal agreements.
Sole proprietorships are popular for people who want to be their own boss.
A potential disadvantage is that courts have ruled that doing business under another name does
not qualify as creating a separate and distinct legal entity from the owner.
Insurance coverage might be pricey for sole proprietors.
Sole proprietorships do not have access to venture capital.
Sole proprietorships can be limited in scope and their lifetime, which means they end if the
business is discontinued or the owner passes away.
As a sole proprietor you must report all business income or losses on your personal
income tax return; the business itself is not taxed separately.
Self-employment means that you are the sole proprietor of the business, a member of a business
partnership, or an independent contractor. A sole proprietor is a one-person business without a
legal entity like a corporation, LLC or partnership

2. Partnership

A partnership is a formal arrangement by two or more parties to manage and operate a

business and share its profits. There are several types of partnership arrangements. In particular,
in a partnership business, all partners share liabilities and profits equally, while in others,
partners have limited liability. A husband and wife may validly form a limited partnership or
become members of such limited partnership because the Civil Code prohibits only the husband
and wife from constituting a universal partnership
Advantages of a partnership include that:
- two heads (or more) are better than one
- your business is easy to establish and start-up costs are low
- more capital is available for the business
- you’ll have greater borrowing capacity
- high-caliber employees can be made partners
- there is opportunity for income splitting, an advantage of particular importance due to
resultant tax savings
- partners’ business affairs are private
- there is limited external regulation
- it’s easy to change your legal structure later if circumstances change.
Disadvantages of a partnership include that:
- the liability of the partners for the debts of the business is unlimited
- each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each
partner is liable for their share of the partnership debts as well as being liable for all
the debts
- there is a risk of disagreements and friction among partners and management
- each partner is an agent of the partnership and is liable for actions by other partners
- if partners join or leave, you will probably have to value all the partnership assets and
this can be costly
 3. Limited Liability Company

A limited liability company (LLC) is a business structure in the United States whereby the
owners are not personally liable for the company's debts or liabilities. Limited liability
companies are hybrid entities that combine the characteristics of a corporation with those of
a partnership or sole proprietorship. An LLC (limited liability company) works as a type of
business entity that provides both liability protection for owners and members and pass-through
taxation
Characteristics of limited liability company include separate legal existence, limited
liability, flexibility in taxation, and simplicity in operation.
As the owner of a single-member LLC, you don't get paid a salary or wages. Instead,
you pay yourself by taking money out of the LLC's profits as needed. That's called
an owner's draw. You can simply write yourself a check or transfer the money from
your LLC's bank account to your personal bank account.
Limited liability is a type of legal structure for an organization where a corporate loss will not
exceed the amount invested in a partnership or limited liability company (LLC). In other words,
investors' and owners' private assets are not at risk if the company fail.
Disadvantages of a Limited Liability Company
The first disadvantage to an LLC is a lack of flexibility when adding or removing owners of the
company. In many states, when a member leaves an LLC, no matter the reason, the business
entity must be dissolved, and all of the legal obligations to closing a business fulfilled. The
remaining members may then start a new LLC if they desire.
Members of an LLC are considered to be self-employed, and are required to pay self-
employment tax contributions toward their social security and Medicare accounts. This tax
amount may be based on the LLC’s entire net income.
Forming an LLC
To create a Limited Liability Company, Articles of Organization must be filed with the state’s
LLC division, which is generally a division of the Secretary of State’s office. Most states provide
a one-page form making the Articles of Organization easy to create, and filing fees vary by state.
Information provided on the Articles includes the LLC’s name and address, contact information
of the registered agent, and names and addresses of the LLC’s members. An operating agreement
should be created, setting out the rights and obligations of each member, as well as their
percentage interests in the company, and share of the profits.
 4. Corporation

A corporation is a business entity that is owned by its shareholder(s), who elect a board of
directors to oversee the organization's activities. The corporation is liable for the actions and
finances of the business – the shareholders are not. Corporations enjoy most of the rights and
responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue
and be sued, hire employees, own assets, and pay taxes
Simply put, a company is any business entity that conducts a value exchange of goods or
services with customers. The end goal of a company should be to earn a profit. Interestingly,
all corporations are considered companies, even though not every company is considered
a corporation.
Shareholders are the ultimate owners of a corporation. They have the right to elect directors,
vote on major corporate actions and share in the profits of the corporation
There are several advantages to becoming a corporation, including the limited personal
liability, easy transfer of ownership, business continuity, better access to capital and (depending
on the corporation structure) occasional tax benefits.
The legal structure of your corporation and the benefits you receive from it will depend on
the specific setup of your business.
Personal liability protection
A corporation provides more personal asset liability protection to its owners than any other entity
type. For example, if a corporation is sued, the shareholders are not personally responsible for
corporate debts or legal obligations – even if the corporation doesn't have enough money in
assets for repayment. Personal liability protection is one of the main reasons businesses choose
to incorporate.
Business security and perpetuity
Corporation ownership is based on percentage of stock ownership, which offers much more
flexibility than other entity types in terms of transferring ownership and perpetuating the
business for the long term.
Although specific details regarding transfer of ownership depend on the governing agreement in
the bylaws and articles of incorporation, ownership of this entity type is often easy to buy and
sell. For example, if an owner wants to leave a company, they can simply sell off their stocks.
Similarly, if an owner dies, their ownership stocks can easily transfer to someone else.
Access to capital
Since most corporations sell ownership through publicly traded stock, they can easily raise funds
by selling stock. This access to funding is a luxury that other entity types don't have. It is great
not only for growing a business, but also for saving a corporation from going bankrupt in times
of need.
Tax benefits
Although some corporations (C corporations) are subject to double taxation, other corporation
structures (S corporations) have tax benefits, depending on how their income is distributed. For
example, S corporations have the luxury of splitting their income between the business and
shareholders, allowing it to be taxed at different rates. Any income designated as owner salary
will be subject to self-employment tax, whereas the remainder of the business dividends will be
taxed at its own level (no self-employment tax).
A corporation is not for everyone, and it could end up costing you more time and money than its
worth. Before becoming a corporation, you should be aware of these potential disadvantages:
There is a lengthy application process, you must follow rigid formalities and protocols, it can be
expensive, and you may be double taxed (depending on your corporation structure).
Lengthy application process
Filing your articles of incorporation with your secretary of state can be quick, but the overall
process of incorporating is often a long one. You will likely have to go through extensive
paperwork to properly determine and document the details of the organization and its ownership.
For example, Sweeney said you need to draft and maintain corporate bylaws, appoint a board of
directors, create a shareholder’s ownership change agreement, issue stock certificates, and take
minutes during meetings.
Rigid formalities, protocols and structure
Alongside the lengthy application process is the amount of time and energy necessary to properly
maintain a corporation and adhere to legal requirements. You have to follow many formalities
and heavy regulations to maintain your corporation status. For example, you need to follow your
bylaws, maintain a board of directors, hold annual meetings, keep board minutes and create
annual reports. There are also restrictions on certain corporation types (for example, S-corps can
only have up to 100 shareholders, who must all be U.S. citizens).
Double taxation
Most corporations (like C-corps) face double taxation, which means that the business income is
taxed at the entity level as well as the shareholder level (based on their percentage of profits
earned). The only way around this is to operate as an S corporation. S-corps eliminate this
problem by only taxing each shareholder on their individual income, not at the entity level.
However, the IRS has been known to pay closer attention to S-corps and even tax them as C-
corps if their records fail to meet the legal requirements.  
Expensive
Corporations are expensive to form and operate. It might be easy for established corporations to
raise capital by selling shares, but forming and maintaining a corporation can be costly. You will
likely need a lot of startup capital to get a corporation running, in addition to paying the filing
charges, ongoing fees and larger taxes. When weighing the pros and cons to determine whether a
corporation is the right legal structure for your business, consult an attorney and an accountant
who are well versed in the implications of creating a corporation.
There are several types of corporations, including C corporations, S corporations, B corporations,
closed corporations and nonprofit corporations. Each has it benefits and disadvantages. Some
alternatives to corporations are sole proprietorships, partnerships, LLCs and cooperatives.
C corporation
As one of the most common types of corporations, a C corporation (C-corp) can have an
unlimited number of shareholders and is taxed on its income as a separate entity. C-corp
shareholders are also taxed on the dividends they receive from the company, and they receive
personal liability protection from business debts and litigation. Ownership for this type of
corporation is divided based on stocks, which can be easily bought or sold. A C-corp can raise
capital by selling shares of stock, making this a common business entity type for large
companies.
S corporation
S corporations (S-corps) are similar to C-corps in that the owners have limited personal liability;
however, they avoid the issue of double taxation. An S-corp is considered a pass-through entity,
meaning its income, losses, credits, and deductions can be passed on to the shareholders to be
reported and taxed on their individual tax returns instead of the company being taxed as a
separate entity.
B corporation
A certified benefit corporation, also known as a B corporation or B-corp, is a for-profit business
structured to benefit society. This relatively new type of corporation is essentially a seal of
approval for S corporations and C corporations, certifying that they are dedicated (and legally
committed) to improving the environment and society. To become a B corporation, you need to
meet rigorous criteria, like scoring an 80 or above on the B Impact Assessment, publicly
reporting your scores on BCorporation.net, and making a legal commitment to consider your
organization's stakeholders. As a B-corp, you will still maintain your C-corp or S-corp tax status.
Closed corporation
A closed corporation – also known as a private company, family corporation or incorporated
partnership – is a privately held company owned by a few shareholders. Shares for these
corporations are not publicly traded, which can make it difficult to raise capital for them;
however, the owners still have the benefit of limited personal liability.
Nonprofit corporation
Business owners can form a nonprofit corporation for religious, charitable, political, educational,
literary, scientific, social or benevolent purposes. Certain states may have stricter requirements
for nonprofit corporations.