Choosing the Best Structure for Your Enterprise
Posted On Friday, May 22, 2009 at by Sun JunAnother thing to consider when starting up a business is to choose which business structure to use for your enterprise. This is important because depending on the business structure that you choose, the registration procedures are different and the structure also determines the extent of your personal liability.
There are 4 business structures to choose from namely: Sole Proprietorship, Partnership, Corporation, and Cooperative.
Sole Proprietorship
A Sole Proprietorship is the simplest and least costly structure to organize. You only need to register your business name with the Department of Trade and Industry (DTI) and get a Business or Mayor's Permit from your local government.
In this structure, you are your own boss. You don't have to worry about partners and board of directors. However, your business is not considered as a separate entity. This means that dissatisfied individuals or entities who have a claim against your business can run after your personal assets. In short, you get to keep all profits but you also assume all the risks and losses.
Partnerships
Partnerships, as the name suggests, involves taking in a partner or partners to start up a business. It involves two or more persons. First and foremost, a partnership agreement is created which is a binding contract among the partners. This contract is referred to as the Articles of Partnership contract. All details in the partnership from the name to the extent of liability of each partner are written on this contract. As this is an agreement among partners, you and your partners are free to insert provisions that you may feel are important.
In a general partnership, the decision of one partner is binding to all. If it turns out to be a poor decision, all of the partners suffer the consequences.
Like in a sole proprietorship, the liability for debts is also personal. However, this will only be up to the extent of your agreed proportionate share in the partnership as stated in the contract. The same principle is applied for profits.
In a partnership, you can choose to become a limited partner. A limited partner can limit the extent of liability one will take. This is good if you don't want to risk all your personal assets. However, not everyone in a partnership can be a limited partner. The law requires that at least one must be a general partner, someone willing to risk all his personal assets for the business.
Corporations
A corporation has a legal entity of its own which is separate from its stockholders. This is its most attractive feature. It is responsible for its own liabilities and in general, this liability cannot be transferred to its stockholders. A stockholder, therefore, only risks the amount of investments he has invested in the corporation.
The corporation code requires a minimum of five individual incorporators to form a corporation. This is also the minimum number of directors a corporation must have.
A downside to setting up a corporation is tediousness of filing numerous documents with the Securities and Exchange Commission (SEC). It is also more expensive to organize than a sole proprietorship or a partnership. In terms of Taxes, the Tax Code levies a 32% income tax rate on corporate net incomes. There is also an additional 10% tax on dividends given to individual stockholders.
Cooperative
A cooperative is like an association of persons with a common bond. To organize one, there must be at least 15 members who are Filipinos of legal age. The primary objective of your cooperative must be to proved maximum economic benefits to each member.
A cooperative, like a corporation, also has limited liability feature. However, unlike a corporation, no one group can dominate the organization. Major decisions have to be cleared by holding a General Assembly. Profits are also shared equitably.
The requirements for setting up a cooperative is the same as those for corporations. However, instead of filing these with the SEC, these are filed with the Cooperative Development Authority (CDA).
Changing Business Structure
As a last note, bear in mind that you can still change from one business form to another. Most small businesses usually start out as sole proprietorships. Later on, when the business has experience considerable growth, they change into a partnership or a corporation.
This is the first part of Chapter 5 of "The Ultimate Guide to Starting Your Own Business."
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