A Guide To Choosing The Right Business Structure

Updated: June 16, 2009

When you’re starting a business, one of the things you need to decide on is its business structure.

Choosing the right type of business entity is important because it directly affects your tax payments, administrative tasks, business risks and development.

In general, you should go for a business structure that gives you the most protection and the least obligations as possible.

This means ample protection of your rights as the owner of the business, as well security of your personal assets, but without drowning in too much paperwork and legal requirements.

So how do you choose the right business structure?

First, you have to know the different types of business ownership that one can organize. Under the Philippine law, they are:

Single or Sole Proprietorship (S)
A business structure owned by an individual. He or she has full control and authority over all assets of the business. That individual will enjoy all the profits but would also personally owe and must pay all liabilities that the business will incur. A sole proprietorship must apply for a business name and be registered with the Department of Trade and Industry (DTI).

Partnership (P)
A business structure owned by two or more individuals. The owners are called partners and under the Civil Code of the Philippines, this partnership is treated as a juridicial person which has a separate legal personality from that of its members.

Furthermore, this can either be a general partnership (GP) or a limited partnership (LP). A general partnership is where all the partners have unlimited liability for the debts and obligations of the partnership while in a limited partnership, there exists at least one person with unlimited liability while the others have liabilities of only up to the amount of their capital contributions.

In the country, a partnership with more than three thousand pesos (P3,000.00) capital must register with the Securities and Exchange Commission (SEC).

Corporation (C)
A business structure owned by at least five (5) individuals, usually more. The owners are called shareholders and they all have liabilities limited to the amount of their share capital. Like partnerships, a corporation is treated legally as a personality separate and distinct from that of its shareholders.

A corporation can either be stock or non-stock. A stock corporation has a capital divided into shares which are distributed to the investors, who in turn, receives dividends and allotments of the surplus profits according to the number of shares they hold.

On the other hand, a non-stock corporation is an entity organized for public purposes such as charitable, educational, cultural or similar purposes. It does not issue shares of stock to its members.

Here in the Philippines, corporations are regulated by the Securities and Exchange Commission (SEC). Its minimum paid up capital must be five thousand pesos (P5,000.00).

What are the factors you should consider when choosing a business structure? In general, these are:

1. The degree of control you want to have over the business.

• S – full control
• P & C – control is shared with partners and shareholders

The degree of formal organization you need.

• S – very simple, least formal
• P – moderately complex, can be quite formal
• C – most complex, very formal

The need to protect against liability for business actions.

• S – full liability, there is risk to lose personal assets
• GP – liability is shared with partners, there is risk to lose personal assets
• LP – liability is shared with partners, no risk to personal assets
• C – liability is shared with shareholders, no risk to personal assets

The ability to attract investors.

• S – quite hard to attract investors
• P – moderately easy to attact investors
• C – easy to attract and incorporate new investors

Legal and tax requirements.

• S – simple and usually straightforward, but pays the most taxes among the three
• P – quite complex, reasonable tax dues
• C – most complex and can be quite tedious, but relatively pays the least amount of taxes

I suggest that you give yourself enough time to study these business structures, specially the legal and tax requirements, before deciding on what to apply for.

However, based from experience, a sole proprietorship offers the best business structure for start-ups. Simply because it is the easiest to process and accomplish, which in return, gives you (and your partners) more time to focus on developing and establishing the business.

If you’re doing this strategy, do make sure that you have an internal agreement that explicitly obliges the assigned proprietor an obligation to share the profits to the partners and shareholders. But more importantly, when the business becomes stable and starts to steadily grow, be sure to migrate to a partnership or a corporation to make everyone a legal owner of the business.

In general, always consider starting with the most simple business structure that is appropriate for your venture. And then adopt more complicated structures only when there is a necessity, such as to answer concerns with authority, control and liabilities or when there is a specific legal or tax advantage.

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Photos courtesy of obo-bobolina and woodleywonderworks