With the implementation of the Revised Corporation Code1, business owners now have the option to register as a One Person Corporation (OPC). This article aims to provide prospective and existing business owners an understanding of the new law and how it will affect their business and decide for themselves whether they create an OPC or register as a sole proprietor.
Related: An Ultimate Guide to Philippine Tax: Types, Computations, and Filing Procedures
Let’s discuss the differences of having control of a corporation vs. registering as a sole proprietor:
A corporation has limited liability because it is considered as a separate juridical entity from its shareholders. Meaning, the shareholders do not have any liability if there are unpaid debts or if the corporation has been sued. While for sole proprietors, the creditors and the law can go after the owner’s personal assets because there is no separation between the business and the owner.
2. Perpetual Ownership.
A corporation’s life can be perpetual, meaning a corporation can become a legacy surpassing all of its original incorporator’s life. Also, ownership of a corporation is transferable. So if the owner passes away, his estate or his heirs will inherit all his property including the stock certificates. While for sole proprietors, his business is directly connected to his person, therefore if the owner dies or becomes incapacitated, the business has no choice but to dissolve.
Domestic Corporations have a fixed 30% regular income tax rate while sole proprietors have the option to be taxed either at an 8% preferential tax rate or using the graduated tax table.
As for optional standard deductions, corporations can deduct their direct costs first before deducting a fixed 40% OSD in lieu of itemized deductions while for sole proprietors, the tax base for OSD is their gross revenues. This means that corporations may have a lower tax payable compared to their sole proprietor counterparts.
4. Special Tax and Penalties.
Special taxes that are unique to corporations are minimum corporate income tax (MCIT) and improperly accumulated earnings tax (IAET).
MCIT is a 2% tax based on the gross income which is imposed on a corporation if their regular corporate income tax is lesser than their MCIT. Meaning, even if your corporation is not earning income, you have to pay taxes.
IAET, on the other hand, is the penalty given to a corporation if it fails to declare dividends. This is because the accumulation of profit delays dividend tax and that is why the BIR discourages such acts.
5. Profit Repatriation.
Dividends are the only way that a corporation can “pay” its shareholders. The assets of a corporation are separate from the assets of its owners and therefore any transaction between the two parties can be taxed. Cash dividends are normally taxed at 10% when declared.
While for sole proprietors, the assets of the business are the assets of the owner so no need to transfer, otherwise that is just putting one’s money in one pocket to his other pocket.
Deciding which business classification to go with requires careful examination of facts and how comfortable the owner is with the additional obligations a corporation requires. In the end, with whatever classification the entrepreneur chooses, he/she must abide by the rules and perform their obligations to their stakeholders.
Go back to the main article: How to Register with BIR as a Self-Employed/Mixed-Income Individual: A Guide to BIR Form 1901
About the Author.
Miguel Dar is a CPA and an experienced tax consultant who specializes in tax audits. He provides tax advice to various start-up enterprises and clarified tax concerns of individual taxpayers. This includes assisting clients in registering their businesses, tax and bookkeeping training for start-up businesses, settling open cases, tax planning for future tax compliance and answering tax-related inquiries. Connect with him on Linkedin.