A Guide to Help You Choose the Right Business Structure
As a starting business owner, you have a lot to think about. Primarily, you have to decide which business structure you have to take.
Choosing the right business structure for your company is important. This will affect how you register, operate, and pay for taxes. Additionally, your business structure will provide for how much protection you will get when things go wrong.
Are you currently thinking about the right business structure for you? We’ve got you covered. This article is your complete guide to choosing the right business structure.
What is the Right Business Structure for You?
There are three general business structures you can choose from. That is the sole proprietorship, partnership, and corporation. To know which is right for you, you have to look in detail at what each structure entails.
This is a business owned by one owner. The owner will have full authority and control over all business aspects. He will also enjoy all the profits for himself. This is the ideal business structure for those entrepreneurs who work best on their own.
However, this structure also has its downsides. The owner will have to plan and supervise by himself. Business can be stressful at times, and being a single owner can be problematic too. Moreover, he is also solely liable for the business’ debts.
A partnership is a business owned and managed by two or more individuals. The partnership is an agreement between partners to contribute money, property, and industry into the business. A partnership is advantageous because more people are contributing ideas, funds, and efforts to the business.
They will also have to agree on how they will divide the management, profit, and losses among themselves. If they did not agree on this, we assume that they will divide the profits and losses based on the percentage of capital contribution.
The disadvantage of having a partnership is that it has unlimited liability. In the eyes of the law, the partners are the business itself. Therefore, if the company commits a debt that the company assets cannot cover, the partners will have to pay it from their personal properties. This means that the personal assets of the partners are not protected by the formation of a partnership.
Moreover, they can agree to create a limited partnership. A limited partnership must have at least one general partner who will be personally liable for business debts if business assets cannot pay for it. The rest of the partners, called limited partners, are liable only up to their capital contributions.
A corporation is a business created by the operation of law. Here, the business owner/s can be one, two, or more. The business owners will have to register to create a corporation to the Securities and Exchange Commission (SEC). Upon review of the documents, the SEC then issues a certificate of incorporation indicating the creation of an artificial being- the corporation.
The Philippine Corporation Law governs Philippine corporations. This law provides for the separation of the business and its owners. Therefore, the law protects the personal assets of the owners. So, in cases when the business fails to pay its debts, company creditors cannot run after the personal properties of the owners.
Moreover, the corporation has an unlimited life. Meaning the business can continue even if an owner withdraws its ownership, a new owner enters, or an owner dies. These changes do not affect business operations.
The disadvantage of corporations is that it is fairly difficult to create and manage. Upon registration and request for incorporation, owners will have to submit and process sets of documents. This processing can also be costly depending on the size of your company. Further, accounting, taxation, and compliance of corporations are also more complicated than the other two business structures.
Company Formation in the Philippines
So, which business structure is the right one for you?
Sole proprietorship is the easiest business to form and manage. You get all the earnings for yourself, but could be stressful to manage all on your own. Meanwhile, partnerships are favorable because you get to share the burden of running a business with your partners. Corporations are like an improved partnership. You get support in doing business, while protecting your personal properties from business risk.
Understanding each business structure will help you choose which one you will benefit more from. You have to weigh the pros and cons and assess which business structure will help you achieve your goals.
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