Starting a business as a solopreneur means making all the decisions yourself. Besides coming up with a good product or viable business plan, choosing the right business structure is also crucial.

Solo business owners have two options for their business structure: sole proprietorship and OPC. Choosing the appropriate structure for your company is not a light decision, as it becomes the legal foundation of your business. Your chosen structure determines how to register your company, pay your taxes, remain compliant, and more.

Given the legal structure's impact on your business, making an informed decision is vital. In this guide, we’ll explore the details of a sole proprietorship and an OPC and their pros and cons.

Discover which structure best aligns with your goals and set the proper foundation for your budding business.

A sole proprietorship is the most common and basic form of business ownership. In this form, only a single individual—the sole proprietor—owns and controls the business. Due to its simplicity, sole proprietorship has become the go-to choice for new entrepreneurs, freelancers, and self-employed professionals.

It’s essential to note that a sole proprietorship is not a separate legal entity from the owner. There’s no boundary between the owner's personal and business assets. The sole proprietor assumes full ownership of all company assets and bears full liability for debts and losses.

Registering a sole proprietorship is a straightforward process involving the Department of Trade and Industry (DTI), your local government unit (LGU), and the Bureau of Internal Revenue (BIR):

• DTI: Register a business name with the DTI, which would serve as the company’s unique identifier to the government and also shape your brand identity.
• LGU: Generally, businesses must secure a business permit from the LGUs. Depending on the nature of your business, they may also require other permits, such as sanitary and fire permits.
• BIR: Registering with the BIR ensures businesses pay taxes correctly. If you have an existing tax identification number (TIN), you must update your records and acquire a Certificate of Registration (COR). Otherwise, you should apply for a TIN and then register your business.

When hiring employees, you must register your business with the following agencies to provide them with the government-mandated benefits:

• Social Security System (SSS) - This system provides social security benefits, such as retirement pensions, to Filipino workers in the private sector.
• Home Development Mutual Fund (HDMF or Pag-IBIG) - Promotes homeownership for Filipino workers through savings programs and affordable housing loans.
• Philippine Health Insurance Corporation (PhilHealth) - Provides health insurance coverage for Filipinos to help pay for a wide range of medical services.

Understanding the benefits and drawbacks of a sole proprietorship is essential for deciding if this structure is right for you. To start, here are some advantages of a sole proprietorship:

• Simple registration: Registering a sole proprietorship is straightforward and only involves minimal fees compared to other structures.
• Easy to maintain: To remain compliant, owners must only pay their taxes as scheduled and renew permits when they expire, such as DTI registration every five years. Unlike legal structures regulated by the SEC, such as corporations, sole proprietorships have fewer compliance requirements.
• Complete control: Sole proprietors fully own the business, allowing owners to drive business operations in their desired direction. Moreover, the owner retains ownership of all the business’s assets and profits.
• Straightforward taxation: Owners only need to pay taxes on their income, which can either be at 8% income tax or a graduated tax rate.

While the advantages of sole proprietorship can be appealing, it also has its drawbacks:

• Unlimited liability: Sole proprietors are fully liable for the business’s debts and losses, which means institutions can seize their personal belongings and assets when the company incurs a loss or defaults on a loan.
• Limited access to funds: Sole proprietorships can’t issue company shares, making it difficult to attract investors. As a result, sole proprietors opt to bootstrap their businesses or seek capital from banks.
• No perpetual succession: When the sole proprietor dies, their heirs inherit the assets and liabilities. However, all business registrations and permits expire. If the heirs want to continue the same business, they must register it again as their own.

A one-person corporation (OPC) combines the best features of a sole proprietorship and a corporation. In an OPC, the owner maintains control over the business but enjoys a corporation’s limited liability.

The business owner is the sole stockholder, the director, and the president of an OPC. In contrast, a corporation requires at least two incorporators and can have up to fifteen.

If you plan to have more than one incorporator in your business, you should register as a corporation. Although OPC has shares, selling or transferring part of your shares to another investor or potential shareholder requires converting your OPC into a traditional corporation, as the company will have at least two shareholders.

They must also appoint a nominee and alternate nominee to take over their duties if rendered incapable.

There is no board of directors, but the owner assigns a Corporate Secretary and a Treasurer for the company. Owners can appoint themselves as the Treasurer if they comply with the Securities and Exchange Commission (SEC) surety bond requirements.

The main difference between registering a sole proprietorship and an OPC is that OPC registration goes through the SEC instead of DTI.

Afterward, the owner should also comply with the requirements of the LGU and BIR:

• SEC: Apply for a company name with the SEC and submit the requirements, including the articles of incorporation, written consent from nominees, and other documents that the SEC may request.
• LGU: Obtain a business permit and other permits that may be specifically related to or required by your business. Aside from a sanitary permit and fire safety inspection certificate, you may be required to have a building permit, electrical inspection certificate, and more.
• BIR: Register with the BIR to know what specific taxes you must pay. Apply for a TIN or update it accordingly, and comply with the other business requirements requested by the agency. Also, remember that BIR registration is renewed annually, but thanks to the EOPT law, the renewal fee is now waived.

If they plan to hire employees, OPCs should also register with SSS, Pag-IBIG, and PhilHealth, the same as sole proprietorships.

Knowing OPC's advantages and disadvantages is essential to determining whether it is the right choice for your business.

An OPC offers key benefits, such as:

• Limited liability: OPCs have a separate legal entity for the business, protecting the owner’s assets in the event of business losses or debt accumulation.
• Complete control: Similar to sole proprietorships, the sole stockholder in an OPC has complete control over all business operations.
• More access to funds: Financial institutions view OPCs more favorably due to their corporate status. Their legal structure brings a sense of formality and credibility, making it easier to borrow capital.
• Perpetual succession: An OPC can continue despite the transfer of shares, change of directors, or even when the owner passes on. This makes OPCs appealing for long-term transactions and investments and eliminates the need to start from scratch even when the initial owner is no longer involved.

Beyond the benefits, being an OPC has its trade-offs:

• Complex registration: In addition to registering a corporate name, the SEC requires additional documentation like articles of incorporation and written consent of the nominees. OPCs require more reportorial requirements, including audited financial statements and disclosure of all self-dealings, which could be quite a lot for the sole owner to handle.
• Not suitable for all businesses: Not all companies can become an OPC. For example, financial institutions and licensed practicing professionals are not eligible to be OPCs. Publicly-listed companies also can’t be OPCs due to their nature of having more than one shareholder.

Foreigners can establish sole proprietorships and OPCs only in industries with no foreign ownership restrictions and those excluded from the Foreign Investment Negative List (FINL).

Some of the industries foreigners can venture into are business process outsourcing (BPO), knowledge process outsourcing (KPO), and retail trading upon meeting the minimum paid-up capital of ₱25M.

For sole proprietorships, the DTI requires foreigners to obtain a Certificate of Authority to Engage in Business in the Philippines (CAEB) before registering a business name.

There’s no one-size-fits-all answer when choosing between sole proprietorship or OPC. Instead, the best thing to do as a solopreneur is to assess your circumstances and goals and see which offers you more advantages.

Here are the factors to consider when deciding on a business structure:

Establishing a sole proprietorship is undoubtedly easier than registering an OPC.

You must only submit a business name when registering a sole proprietorship with the DTI.

Meanwhile, you must submit a corporate name, articles of incorporation, and other documents when registering an OPC with the SEC.

OPCs also have more reportorial requirements to remain compliant, such as audited financial statements and business self-dealing disclosure.

Diligently paying taxes is a crucial part of running a business. But what’s the tax difference between a sole proprietorship and an OPC?

For sole proprietorships, BIR generally offers more options when paying income taxes.

Sole proprietors with income below the value-added tax (VAT) threshold of ₱3M can choose between an 8% tax rate or a graduated rate, ranging from 0% to 35% plus a 3% percentage tax.

Businesses over the VAT threshold are subject to the graduated and 12% VAT rates.

OPCs, on the other hand, are typically taxed at a flat rate of 20%- 25%, depending on their net income and assets. Once they exceed the VAT threshold, they should also pay a percentage tax or VAT.

With these tax schemes, it might be more beneficial for a business to register as a sole proprietorship if they have a lower income and could avail of the 8% rate or a lower graduated rate.

Conversely, it might be more helpful to be an OPC if you have a higher taxable income to keep your tax rate at a maximum of 25%.

You can estimate your expected income based on market research or industry benchmarks for new business owners without any income history. Consulting with experienced business owners can help create your projections.

Consider consulting with tax professionals to see which tax scheme is more advantageous for your company, depending on your potential income, expenses, and tax benefits you could avail yourself of.

Seasoned tax experts also offer valuable advice based on their experience with clients in the same industry and help you choose the optimal business structure.

While sole proprietorships offer simplicity and potentially lower taxes, they have the drawback of unlimited liability, which can put the owner's personal assets at risk.

In contrast, OPCs offer limited liability, protecting the owner’s assets from business-related liabilities unless ill intent is proven.

Scaling a business requires funding as you need money to improve or make more products, expand the business, or hire more people.

Long-term growth can be challenging for sole proprietorships since they can’t issue shares to get funding from investors. If bootstrapping isn’t an option, sole proprietors can take loans, which could be problematic if they don’t have good credit.

On the contrary, OPCs are simpler to scale because they have more access to financial assistance, and banks are more likely to lend to corporations.

Also, perpetual succession makes OPC ideal for legacy building since it ensures the company’s continued existence by easily transferring company ownership. This succession helps generations of families continuously develop the business and foster long-term growth.

Technically, you can’t directly convert a sole proprietorship to an OPC, and vice versa, since they have different governing bodies: DTI and SEC. However, a workaround is legally closing your sole proprietorship and registering a new company as an OPC.

Ensuring you have closed your sole proprietorship business with the DTI and BIR is crucial to avoid unnecessary fees and penalties while operating your new OPC.

There are many reasons why sole proprietors switch their business structure to an OPC. If you're contemplating whether an OPC might be right for your business, here are some signs that it may be time to consider making the transition:

• Liability concerns: If your business is growing and you want to protect your assets from business liabilities, an OPC can provide you with limited liability protection.
• Funding needs: Being an OPC is more advantageous when seeking funding, especially loans since financial institutions are more likely to lend to corporate businesses.
• Tax considerations: If your taxable income has increased significantly, being an OPC might be more cost-effective since it has a lower maximum tax rate.
• Exit strategy: OPCs are ideal for business owners planning their exit strategy but wanting the company to continue running smoothly in their absence, thanks to the benefit of perpetual succession.

Watch this video for more insights on sole proprietorship and OPC:

All decisions fall onto your shoulders as a solopreneur, so being well-informed is always important.

If you’re having trouble choosing between a sole proprietorship and OPC or need help with your business registration, OneCFO is the one to call!

With our team of finance experts, OneCFO can assess which structure best suits your goals and needs.

In addition, OneCFO is the one-stop shop and end-to-end business registration service provider for SMEs and startups in the Philippines.

Launching your business in the Philippines shouldn’t be a paperwork nightmare. We handle everything from incorporation to employee benefits with government agencies and opening your bank account, all at a competitive price.

Schedule your FREE consultation today to learn how we can help you legally register your business and start it right from day one.

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