Single and Ready to Incorporate
Things to consider before choosing between OPC or Sole Proprietorship
With the passing of the Revised Corporation Code where a One Person Corporation (OPC) is recognized, and following the release of guidelines for its establishment just this May 6, 2019, none are as happy as individual entrepreneurs looking to enjoy the benefits that a corporation has.
Starting business owners may be looking to kick off their company as an OPC directly. On the other hand, existing sole proprietorships may be looking to convert their businesses into an OPC. However, before we jump ship on which type of business we should register as, it is important to assess where we will ultimately be better off. Let’s dive down and see where an individual business owner will find their true happiness.
Limited Liability
One characteristic of a corporation that sole proprietorships envy is limited liability. Corporations, upon successful registration, acquire their own juridical personality. This enables corporations to contract using their corporate name unlike for sole proprietorships who are forced to enter under the individual business owner’s name. So what’s the advantage in that? The answer lies in the fact that creditors are able to get a sole proprietor’s personal assets if worse comes to worst.
As a separate entity aside from its single shareholder, an OPC acts as a blanket of protection for individuals. For any outstanding debt the corporation is unable to pay, creditors can’t ask for the application of payment using the assets of its single shareholder. This advantage is useful if you’re not looking to co-mingle your business assets with your personal one as you never know when they may be taken away.
However, this advantage is not really absolute. An OPC must also prove that it was adequately financed in order for the liability not extend to the single shareholder. Also goes without saying that when authorities figure out that the OPC is being used for fraudulent purposes, its single shareholder should be ready to carry the liability its OPC has.
Tax Purposes
An OPC is subject to corporate tax regulations and requirements just like any other corporation. Is that an edge over sole proprietorship? Maybe yes, maybe no. For tax purposes, there is no clear cut winner on who has the advantage.
In terms of income tax rate, an OPC has a flat 30% while sole proprietorships are subjected to graduated rates like other individuals. The rates for individuals go as low as 0% and as high as 35% plus base taxes. With this it is clear that you have to accurately project the range where your taxable net income would be to see which business type you have an advantage over. Unfortunately that’s easier said than done as OPC also has different deduction rules compared with what individuals have.
An example of a clear advantage given all other things equal is when an OPC utilizes the Optional Standard Deduction (OSD). For OPCs, the 40% OSD is applied on Net Revenue while for sole proprietorships it is applied on gross revenues. Basically an OPC using OSD will be able to use its cost of goods sold as deductions on top of the 40% OSD.
Not to be upstaged, a sole proprietorship also has an 8% Gross Income Tax (GIT). This option is limited for sole proprietorships with gross sales/receipts not exceeding three million. The 8% GIT is particularly useful for smaller businesses who are subject to VAT or OPT as this tax option is in lieu of those business taxes, meaning the 8% covers income and percentage taxes.
Ease of Doing Business
It is not uncommon for some existing corporations to have five stockholders of which four of them only hold a single share. This is what some individuals have been doing to skirt with the corporation code in order to register as a corporation. Be that as it may, the corporation is still subject to governing rules and regulations which they have to comply. This includes submission of bylaws and provision of rights to shareholders, who you may never know, may exercise them.
With trust and confidence to the placeholder shareholders not important to OPCs, individual entrepreneurs enjoy smoother business operations with a single person decision making body. This may be a selling point for corporations who didn’t have the option to register as an OPC from the beginning and just inserted random friends and relatives into the corporation to meet the five person requirement. The same is true for sole proprietorships but they don’t have the benefit of succession.
A unique trait of an OPC is that it enjoys succession. Upon registering, the individual shareholder must name a nominee and alternate nominee. In case of death or incapacity, the nominee will take control of the management of the OPC until the rightful heirs are able to take over. In the case of sole proprietorships, the net assets of the business go their separate ways to the heirs and the continuance of the business is much harder to predict as they have to apply for a new and distinct business license.
In the long run, it may also be wise to register as an OPC from the start. If the individual stockholder is looking to grow exponentially through the help of some investors, it is much easier to convert an OPC to a regular corporation in contrast when the starting point is a sole proprietorship. For a sole proprietorship to become a corporation it will have to undergo transfer of assets which have tax implications as you will be required to report it at fair market value.
Wrapping Up
As thrilled as some individuals are in the advent of OPC, they should not be hasty in deciding to register their endeavors as one. It is key to weigh the risks and benefits of an OPC and sole proprietorship and see if they fit your future plans for your business. An OPC may be better for you, but not for another. Though basically you are the single entrepreneur in either OPC or sole proprietorship, the way your business will run will be entirely different in either options.
About UpSmart
UpSmart is the premier financial consultancy firm in the startup, SME, and social enterprise industry. UpSmart specializes in strategic finance (e.g., structuring and restructuring of legal entities, valuing and modelling companies, serving as chief financial officer of companies) and operational finance (e.g., optimizing business processes and controls, accounting and bookkeeping support, financial reporting and analysis).
About Luke
Luke is an associate in UpSmart’s consulting practice. He previously was the Editor-in-Chief of UP Guilder Institute, the premier business publication of UP College of Business Administration.
