Corporation as Business Structure: Most Preferred for Your Growing Enterprise

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Published — March 16, 2017

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Advantages of Forming a Corporation

You might be thinking of starting your own business. Becoming a sole proprietor may be at the top of your head right now. However, you may have a better option – forming a corporation. A corporation promises a more prestigious form of business. In fact, the biggest, richest and most prominent companies in the world are corporations.

In business, the use of a proper business entity or structure is of paramount importance because it can spell the difference between success and failure. While there are no hard and fast rules on determining which business structure is better, since the advantage in one aspect could be disadvantageous in another, in the legal landscape, formation of corporations is more favorable than forming sole proprietorships or partnerships. Here are the advantages of forming a corporation:

• Separate legal personality – A corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Directors, officers or employees of corporations are generally not held personally liable for corporate obligations incurred.

Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud for an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

• Limited liability – By virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability. In contrast, in a sole proprietorship, the legal entity of the business and that of the owner is the same (save for accounting and tax compliance). Creditors may proceed not only against the assets and property of the business, but also after the personal properties of the owner. In other words, the law basically treats the business and the owner as one and the same. Whereas in a corporation, only the corporate assets and not the personal assets of the stockholders, would be used to pay for the liabilities.

• It can exist with continuity – The Corporation Code provides that the corporate term or life can exist for a maximum of fifty (50) years, renewable for another fifty years. This power of succession provides corporations continuous existence. Thus, the death of a stockholder will not dissolve the corporation, unlike in a sole proprietorship where the death of the owner terminates its existence. The shares of ownership or interest in a corporation can be transferred from one owner to another owner.

• Ownership transferability – Shares of stock of publicly listed companies may be transferred easily through a stockbroker. Shares of stock of corporations are transferable from one to another except when there are restriction agreements entered into by the stockholders. For non-publicly traded corporations, the stock certificate can be transferred or assigned to another owner by executing a deed of assignment of shares of stock.

• Confidence in dealing with a Corporation – Corporations are heavily regulated by the Securities and Exchange Commission. Furthermore, the board of directors are vested with fiduciary duty of loyalty and care with their respective corporations and their stockholders. This means that directors and officers of a corporation act in the best interest of the corporation. These factors, coupled with the corporation’s stock structure, continuous existence, ownership transferability and limited liability, earns more trust and confidence from its employees, creditors, and stakeholders, and further attracts investors which in turn allows the corporation to raise capital or equity to manage and expand operations.

• Management of a corporation – In a sole proprietorship, although the proprietor may have some employees who helps in the decision making, still, the perception is that there is only one person managing the business. Whereas, the management of a corporation lies in its Board of Directors, which consists of not less than five (5) nor more than fifteen (15) directors. Thus, the decisions and operations of the business are carefully and methodically planned and executed in order to achieve the desired result.

• Tax perspective – A sole proprietorship is taxed at a progressive rate of 5-32% while a corporation is taxed at 30% on its taxable net income. There are business expenses that could not be deducted in a sole proprietorship. Moreover, the sole proprietor bears the burden of paying the tax since the tax on its business is its own account. Since the corporation has a personality separate from its directors, officers and stockholders, the tax is for the account of the corporation, the corporation having its own Tax Identification Number. In terms of the 40% Optional Standard Deduction, the tax basis for corporations is the cost of sales (The cost of sales for amanufacturer is the cost of finished goods in its beginning inventory plus the cost of goods manufactured minus the cost of finished goods in ending inventory) while that of sole proprietors is based on gross sales or net receipts.

It is often said that “(Every man should) plant a tree, have a child, and write a book. These all live on after us, insuring a measure of immortality.” There is another tool to immortality – incorporation. Forming a successful corporation is one’s legacy to the world.

Our services:

Registration of a corporation. We believe that registering a corporation should be hassle-free. With our years of experience handling the incorporation of many start-up businesses, allow us to help you legitimize your corporation so that you can focus on what matters most – the operations of your business based on your timeline. We provide legal services to foreign investors, SMEs, and companies with a strong commitment in our mantra of SPEED and QUALITY. To know more, you may contact us through the following:

Email Address: info@alburolaw.com

Contact No.: (02)7745-4391/0917-5772207

Address: Alburo Alburo and Associates Law Offices

Unit 402, Seneca Plaza, 1152 E.Rodriguez Sr. Ave.,

Brgy. Mariana, New Manila, Quezon City

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