OPCs and Sole Proprietorships; Which Works Best For Your Business?
This 2020, One Person Corporations (OPCs) have been a significant addition to the Republic Act 11232 or the Revised Corporate Code of the Philippines. With this addition to the law, entrepreneurs who run their business on their own had two business models to apply— OPCs and Sole Proprietorships.
If you’re on the roadmap to starting a business & are unsure which one to go, comparing the two options is essential. Below is a guide on the five major differences between OPCs and sole proprietorships.
A sole proprietorship is a business structure carried out by one person. Sole proprietors are required to secure a business name and be licensed with the Republic of the Philippines’s Department of Trade and industry.
Contrastingly, OPCs, as defined by the Revised Corporation Code, is a one-stockholder corporation given that the only person, asset, or trust constitute the one-person business. Following that definition, businesses such as insurance companies, banks, and public-listed companies, can’t function as OPCs.
Aside from their distinct definition, there’s also a bright line between OPCs and Sole Proprietorships when it comes to liabilities. Each OPC is a separate legal identity from the business owner. The scope of the liability, therefore, is restricted to their capital contribution or assets only.
Contrarily, though the business owner & the shareholder is one entity as a sole proprietor, no legal distinction is set. Also, the owner has unlimited individual responsibility for losses. Thus it’s feasible to hold the sole proprietor accountable, including their personal assets like their car, house, condominium units, etc.
Another notable difference between OPCs and Sole Proprietorships is with tax payments. With a sole proprietorship, if your business earned P3 million sales & below, your tax payments are calculated based on the under 8% gross income tax scheme or the graduated 20%-35% income tax rate.
With graduated taxation, sole proprietors have two deduction options. One’s itemized deduction where business owners can subtract expenses like marketing costs, rent, salaries, etc. to their sales or revenue.
The second option is 40% OSD (Optional Standard Deduction) (OSD), where business owners can have a 40% standard deduction dependent on gross sales and receipts.
In the case of OPCs, the income tax rate is 30% flat. However, an OPC can take advantage of the optional 40% OSD exclusion from the taxable income. That means OPCs can subtract expenses first and then further deduct the 40% OSD from their gross income.
Policies with succession can be counted as one disagreement between OPCs & Sole Proprietorships. Whenever a sole proprietor passes away, business assets & liabilities pass on to the children or heirs, but the business license expires. The successors need to apply for a new business license if they wish to continue with the business.
There’s continuity with OPC even though the business owner dies. With the owner’s death or incapacity, a nominee can take charge of the company’s operations until a successful transition to the successors. The heirs can then go on running the business with no need for a new business license.
Like succession, scaling or possible expansion is another notable distinction between the two business structures. If the business expands & has scale potential, it’s expected to upgrade to a company. Such progress is possible but may have corresponding tax cost, & takes a lot of time to migrate from sole proprietorship to a corporation.
Switching from an OPC to a corporation is quite easy. The OPC only needs to update the incorporation articles to implement the necessary corporate governance.
How Can 3E Accounting Help Business Owners?
When you’re on your baby steps in putting up a business, you must start on the right track. However, not all of the right tracks are the best and efficient paths. There are many choices in registering your business, which means you might end up in danger if you don’t know which way to go.
The same goes true if you’re already established in the business sector, as new laws & policies may put your business at risk.
The good thing is, 3E Accounting Philippines is always committed to helping business owners to be on the right & best track for their business success. As a leading and dependable provider of incorporation services in the Philippines, 3E Accounting, Philippines, is at your service.
OPCs and Sole Proprietorships are two business structures that have their advantages. A wise decision in choosing which works well with your business draws the line between your success and failure. Take the points mentioned above as a guide & connect with the right provider of incorporation services in the Philippines for your needs. Reach out to 3E Accounting Philippines.