So, you decided to start a business on your own and you can’t decide if you should operate as a Sole Proprietorship or a One-Person Corporation (OPC). Both have its advantages and disadvantages. Here is a breakdown on the difference between the two to help you decide which entity is a better fit for your business model.

Sole Proprietorship One-Person Corporation
Definition Simplest form of business. Not a legal entity but it
refers to a person who owns and is accountable for a business.

The Revised Corporation Code defines the OPC as a “corporation
with a single stockholder: Provided, That only a natural person, trust, or an
estate may form a one person corporation.”

Do note that certain types of businesses cannot operate as an OPC such as
banks, insurance companies, and publicly listed companies.

Cost Government fee is an estimated P15, 000 Government fee is an estimated P33, 000
Liability The owner is directly liable.  This means the law does not put any
distinction between the company and the individual. The person inherits both
the assets and income of the business, but also its debts and losses.
An OPC is a separate entity from the owner. Should the
company lose money or go in debt, the personal assets of the owner will not
be affected.
Name Can be a fictitious name or the name of the individual.
Since it isn’t a separate entity, it won’t have a label.
The company will have the label “OPC” at the end.
Tax

The full income of the owner is taxed, including his/her
salary if still an employee.  This will
require the owner to file a Schedule C, along with the Standard Form 1040. The
final amount depends on a graduated rate.

In addition, if revenue is below P3 million, the entity is
eligible to a final tax of 8% (versus the corporations 30% income tax).

For income tax rate, an OPC has a flat 30%.

An OPC can also avail of the Optional Standard Deduction of
40 percent on its net revenue. Meaning, it can deduct costs first, and then
deduct the 40 percent optional deduction from its gross income.

Permanence Should the owner pass away, the assets and liabilities
will pass to his or her heirs. However, the permits/licenses of the business
expires. So, should any heir would want o continue the business, they will
need to apply for new licenses.
Perpetuity is preserved should the owner pass away. As
part of the application process, the owner is required to designate a nominee
who will takeover the business temporarily, until a proper turnover can be
done.
Scaling Should the company grow and have opportunities to scale
(ex. Expansion, investors, etc.) it will need to switch to a corporation, it
can be done. However, this may have accompanying tax costs and may be time
consuming to close the sole proprietorship and open the corporation.
It’s very easy to switch from an OPC to a domestic
corporation. The OPC just needs to amend the articles of incorporation and
follow the required governance of corporations.

With these, now it’s time to consider what type of business you’ll be setting up and to see which entity is best suited for your company. Do you plan creating handcrafted jewelry during the weekends and selling them online, while keeping your day job? Registering as a sole proprietor would be a good fit. Or, do you plan on setting up your own brand with its own stores in various malls? Maybe consider setting up an OPC instead.

Still need help? Our friends at Permitly offer free consultations! Set an appointment with them now here.

 

Sources:

https://www.entrepreneur.com/article/77798

https://www.philstar.com/business/2019/03/10/1900056/one-person-corporation-vs-single-proprietor

https://www.bworldonline.com/the-one-person-corporation/