What Advantages of Corporation Make it a Better Choice than Sole Proprietorship?
Most of the time, a business stems from an organization or a person’s desire to fulfill the community’s need for a product or service. After all, ventures open when there is a demand. On the other hand, a business is also how innovations are born. However, when starting a company, you need to make multiple considerations. Among those is deciding whether the advantages of a corporation outweigh a sole proprietorship regarding the ownership aspect.
Types of Ownership: Sole Proprietorship or Corporation
When deciding a structure for a business, entrepreneurs have several options. The two most common business vehicles are sole proprietorship and corporation.
So, which one should you choose? Well, numerous factors influence such a decision. Among those factors are management structure, ease of formation, taxation, and protection from personal liability. Below, we differentiate sole proprietorship from a corporation.
A company owner exclusively makes decisions about operations, reports all profit and loss on their income tax return, is personally liable for obligations and debts, and at the same time, has the right to all the profit. If the sole proprietor ceases to operate or, unfortunately, dies, the business will no longer exist.
Corporations are established by filing articles of incorporation to the respective state where the company plans to operate. These documents will specify their address, the business/industry it belongs to, operations it will conduct, and the number of shares it will issue. Also, corporations are separate legal entities, which signify that their operations are different from their shareholders.
Advantages of Corporation Over Sole Proprietorship
Let’s now assess the different advantages of the corporation over the sole proprietorship to help you in decision-making.
1. Credibility as Seen as a Large Scale Business
If you want to establish trust, credibility, and confidence, sometimes going big offers great help. People are usually dismissive of small-scale businesses and would patronize corporations instead.
2. Limited Liability in a Corporation
When you operate as a single proprietor, there’s a tendency where your finances mix up with your business. Why is this possible? Stockholders are only liable to the extent of their stocks.
If there are obligations or debts that a corporation could not pay and results in bankruptcy, the amount or the number of shares you have only correspond to how much you are liable to the corporation. No more, no less.
3. More Minds to Operate the Business
Unless you have all the answers in the world, you need others’ opinions and contributions to thrive. In the Philippines, the Corporation Code stipulates that it requires at least five to fifteen incorporators. Imagine how impactful the decision-making process is when resolving issues and business concerns with many minds for a solution.
4. Viable Tax Management
As per the tax code, a sole proprietorship is bound to the progressive rates of 5-32%. However, corporations are taxed at 30% on their taxable income. There is no doubt that a corporation incurs a lot of expenses to sustain its production. When you look at it, a corporation is taxed only after the distribution of cash and property dividends. For this consideration, it becomes friendlier for a business to operate as a corporation.
5. Long Term Stability
This is another one among the advantages of corporate over a sole proprietorship. Like we mentioned earlier, a sole proprietorship will cease to exist if the person handling it dies. However, that is not the case for a corporation. It can continue to operate as another essential person shoulders the responsibility of a previous director/head of a corporation.
How 3E Accounting Can Help
Our services include Philippine company formation services that are viable for individuals who plan to operate in the Philippines. 3E Accounting guarantees consultancy at its best so that you can see your business thrive.
If you have any queries, don’t hesitate to message us or give us a call. We’re more than happy to help you.