Have you ever wondered about putting up a company but unsure whether to go for a sole proprietorship or corporation? Do you wonder what are the advantages of having a corporation in terms of taxes and liability?
Or you are an existing sole proprietor and wondering if its more beneficial to transition to One Person Corporation (OPC)? Will OPC be more beneficial in terms of taxes?
If you’d like to know the answer to these questions, then read through this article.
Is a business structure that is owned by a single individual. The owner owns all the assets and has unlimited personal liability for losses since there is no legal distinction between the owner and the business. A sole proprietorship must apply for a business name and must be registered with the Department of Trade and Industry (DTI).
One Person Corporation (OPC)
As the name suggests, OPC is a corporation with a single stockholder. In the former corporation law, you need to have at least 5 incorporators to form a Corporation. But with OPC, no need for 4 other incorporators and no need for a board of directors.
As a sole proprietor, you can elect to be under the 8% gross income tax regime (this is applicable if you have sales/receipts of P3 million and below) or under the graduated tax rates of 20%-35%.
Under the Graduated Rates, you can choose the mode of deduction; I. Itemized (i.e., you will use your expenses such as salaries, rent, advertising, etc. as a deduction from your sales/revenues) or II. 40% Optional Standard Deduction (OSD) (a standard deduction of 40% based on gross sales/receipts for sole proprietor and based on gross income for OPC).
Let’s take a closer look which mode of deduction will give you the tax savings if you have P15 million in sales, P4 million in costs and P2,265,000 itemized deductions:
Under OPC, the tax due is P2,620,500, lower by P46,750 as compared to Sole Proprietorship. Remember that the income tax rate for Sole Proprietorship is 20%-35% while for OPC, its fixed at 30%.
Now, let’s say, that instead of using itemized deductions, you’ve opted to use 40% OSD, here is how it looks like:
Notice that for Sole Proprietorship, the basis of 40% OSD is the Sales, while for OPC, the basis is the gross income. For Sole Proprietorship, you can use only the OSD as a deduction, while for OPC, you can use both the costs and the OSD as a deduction resulting to lower income tax due for OPC by a whopping P798,000.
An OPC has a separate juridical personality from its owner. Hence, the extent of liability is only up to the capital contribution/assets. While for a sole proprietor, the businessman and the owner are the same person (you share the same TIN). The owner has unlimited personal liability for losses since there is no legal distinction between the owner and the business. So a sole proprietor can be made liable up to his/her personal properties such as car, house, condo, etc.
When a sole proprietor dies, the assets and liabilities of his/her business will be transferred to his/her children/heirs, and the license over the business will expire. If the children/heirs want to continue the business, they need to secure a new business license. For OPC, there is continuity even if the owner dies. In the event of death or incapacity of the OPC owner, the nominee will take over to continue the business operations until the successful transfer to the heirs. The heirs then can continue to operate the business without the need to register a new corporation.
The results of our comparison point to OPC as more advantageous, not just with the potential tax savings but also with other aspects.
However, this does not automatically mean that the same is true for your business. That is why if you have questions, feel free to send us a message using the contact form below or at firstname.lastname@example.org so we can understand your financial and company structure and assess which is more beneficial for you after considering all the relevant factors of your business.
Disclaimer: The contents of this article may become outdated because of changes in the rules and regulations. It does not substitute the need for professional advice.