Company Types and Their Pros and Cons
By: Noel C Ducusin
You are probably wondering what options you have in terms of company setup. You may also be concerned about how the different local options compare with the business entity types in your home country.
In this article, we will discuss the local options you have as well as their pros and cons. You might be surprised that the company types, while coming with different names, are remarkably like that in your home country, especially for the USA or European economies and other countries based on those systems.
There are three (3) main types of business vehicles, i.e., the sole proprietorship, the partnership, and the corporation. Each has its pros and cons. We will discuss each in terms of ease of setup, limited liability protection, and some unique features that you will need to factor into your decision-making.
Sole Proprietorships
This is by far the easiest thing to set up. All you need to do is decide on your business name and register it with the Department of Trade and Industry.
Please note, however, that this business entity does not have a separate legal personality from you. Basically, it is just an extension of yourself. Therefore, there is no limited liability protection. Any debts and obligations of the business will become your personal debts and obligations such as your personal assets, personal bank accounts, home, vehicles, and the like, will be subjected to attachment by creditors in case something goes wrong.
For the same reason that this business type is just an extension of yourself, in case you want to bring in investors, your only option is to issue debt for which you will be personally liable.
Please also note that you cannot use this entity if you will be participating in an industry that is partially or wholly restricted to foreign nationals for the same reason that investors cannot be brought in to hold an equity position however limited that position may be.
For our article on how to participate in restricted or fully nationalized activities, you may click here.
Again, since this business type is essentially just an extension of yourself, if something should happen to you and you pass away, the business goes with you, and it will have to be wound down and subjected to an inheritance procedure which is a hassle that no creditor nor business partner likes to participate in.
Partnerships
This is the second-best option in terms of ease of setup.
Essentially, you just reserve a name and then file your articles of partnership with the Securities and Exchange Commission. Please note that the filing of these papers is now with the Securities and Exchange Commission and not with the Department of Trade and Industry.
Generally, partnerships are also extensions of yourself and your partners and therefore there is no limited liability protection. It is very important to remember that you must specify in your articles of partnership that it is a limited partnership and that your participation in the partnership is on a limited basis only to avail yourself of limited liability protection.
Regardless of whether the partnership has limited liability protection or not, it has the same disadvantage as the sole proprietorship in the event a partner withdraws from the partnership or passes away wherein the partnership is immediately deemed dissolved and must be wound down.
Similarly, this is a situation disliked by creditors, business partners, and co-partners. This can happen all too often when there is disagreement among co-partners and not just in the instance where one partner passes away.
The advantage of this form of business entity compared to the sole proprietorship is that you can bring in investors and give them ownership stakes in the partnership. In effect, they will be getting a form of equity in the partnership - something that is not possible in sole proprietorship.
Corporations
This is the most common form of formal business organization. This is because all corporations in the country have limited liability protection.
Furthermore, corporations are deemed to have a legal personality separate and distinct from their shareholders. Therefore, in case a shareholder dies or exits the company, the entity continues as a body corporate as if nothing happened. This is a definite plus for creditors and business partners as continuity is protected.
The further advantage is that when it comes to participating in partially nationalized industries, the regulations almost always refer to corporations where there are shares and equity positions up to the allowed nationality restriction. This contrasts with partnerships where although investors can take an ownership position, such ownership position is not strictly “equity" in the normal sense consisting of shares in a company.
For a related discussion on what industries are partially nationalized or not, you can access our related article here.
There are basically two types of corporations. The main distinction lies in how many shareholders/owners there are.
We have the regular corporation where you can have multiple shareholders and directors compared to the 0ne Person Corporation which can only have one owner and one director.
For our related article on the advantages and disadvantages of each, you can click here.
Finally, the corporate entity in the Philippines is very similar to corporate entities abroad such that it is much easier for transnational companies to integrate these local corporations into their global structure including their financial reporting.
Of course, these benefits do not come with their disadvantages which are mainly a more involved process for company setup. The overall company setup procedure is still straightforward but compared to sole proprietorships and partnerships, a little more work must be done.
For our related article on how to expedite setting up your local company, you can click here.
We hope this information has been useful to you. Please stay tuned as we will be launching our informational resource on how to do business in the Philippines soon.
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About the Author
Atty. Noel C. Ducusin is the senior and founding partner of the N. Ducusin & Partners Law Offices - a law firm based in Metropolitan Manila, Republic of the Philippines that specializes in Corporate Advisory, Cross Border Regulatory Matters, Mergers & Acquisitions, and Commercial Litigation.
Atty. Ducusin is also the President & Sole Director of DoingBusinessPH OPC - a company dedicated to empowering foreign investors to do business in the Philippines through online executive education programs, digital books, seminars, as well as online and offline events.
His mission for this Community is to help foreign investors, business owners, and managers by breaking down complex legal concepts and dense technical material into simple, straightforward, and actionable legal information for better business decisions. For easy reading, articles and briefs will be in simple everyday language without legal jargon.
This is not the place for academic writing and legalese will not be tolerated here.
The simpler and the more practical the better.
“Everything should be made as simple as possible, but no simpler.” – Albert Einstein