Like the many islands and cultures in the Philippines, businesses can take shape in various legal structures. Choosing the right structure lays the groundwork for how you operate, influencing how you register your corporation to the taxes you pay.
If you’re thinking about running a business by yourself, this is the guide for you! However, being your own boss means making crucial decisions and being accountable for everything. So, what are the advantages and disadvantages of a sole proprietorship business in the Philippines? Here’s what you need to know to succeed in flying solo!
What is a Sole Proprietorship Business?
A sole proprietorship in the Philippines is a company owned and managed by one person. It’s the most straightforward business structure, where you, as the owner, make all the decisions and reap all the profits.
Unlike other business structures, sole proprietorship law in the Philippines states that the company doesn’t have a separate legal identity from its owner. It implies that, in the eyes of the law, the proprietor and the business are essentially the same. With this, the company uses either the owner’s legal name or a trade name under which it operates.
The absence of a separate legal identity from its owner is crucial because the business and the proprietor’s assets are directly tied. Any considerations you make may have liability and legal consequences.
For official recognition, you must undergo the registration processes with the Department of Trade and Industry (DTI), the Bureau of Internal Revenue (BIR), and the local Barangay where your business operates. This step ensures compliance with regulations and facilitates the company’s smooth operation within the confines of the law.
The number of employees is also flexible. Depending on the nature and scale of the business, you may choose to run everything yourself or hire employees to help you.
Differences from Other Business Structures
What are the aspects of sole proprietorship vs. a corporation in the Philippines? Here’s a quick look at the key differences.
| Aspect | Sole Proprietorship | Partnerships | Corporations |
| Ownership | One individual | Two or more | Shareholders |
| Legal Identity | Integrated with owner | Separate from owners | Distinct legal entity |
| Decision-Making | Sole proprietor | Collective | Board of Directors |
| Liability | Personal liability | Shared among partners | Limited to investment |
| Registration | DTI and LGU | SEC and LGU | SEC and LGU |
Ultimately, understanding the characteristics of sole proprietorship over the other structures helps in business planning and tells you which laws you must study to stay compliant.
Advantages of Owning a Sole Proprietorship Business
There are various sole proprietorship advantages you can gain for operating under this structure, including:
Flexibility and control
As the sole decision-maker, you can adapt swiftly to market changes. Whether it’s altering business strategies or responding to customer needs, the flexibility of a sole proprietorship allows for immediate action with no pushback.
This level of control is a powerful asset, especially in today’s digitized era, where rapid responses to evolving trends can make or break a business.
Ease of formation and operation
Forming a sole proprietorship is straightforward; you only need to provide the proper documents and register at the DTI and the LGU. Unlike partnerships or corporations, you’re the only decision-maker and can ignore all the bureaucratic hurdles.
You also don’t need to consult anyone else on how to operate your business. You can choose to wear all the hats in your business and fly solo or hire employees in your stead. As the owner, you also set the guidelines and rules for the company and can change them when needed.
Direct taxation
Unlike corporations with intricate tax structures, sole proprietors file taxes on their income. This simplicity extends to the filing process, reducing your administrative burden. Direct taxation also means the law treats the business’s profits as the proprietor’s income. Knowing this rule makes predicting how much you must file as your tax obligations easier.
Profit retention
Compared to partnerships or corporations, where profits are often divided or reinvested, sole proprietors have instant access to the fruits of their labor. Keeping all the profits simplifies your bookkeeping and empowers you to make personalized decisions on utilizing your earnings.
Disadvantages of Owning a Sole Proprietorship Business
While the benefits are compelling, you must consider the potential disadvantages of sole proprietorship. Here are the aspects to bear in mind:
Unlimited liability
The owner is responsible for all business debts and liabilities. This means that in financial or legal challenges, your assets, such as your savings or even your home, may be at risk.
Limited capital and resources
A common challenge sole proprietors face is the difficulty in raising capital or handling cash flow to expand. Unlike larger entities, it may be challenging to attract significant investment. To secure the funding you need, you can explore alternative financing options, such as small business loans or working capital loans, to inject the necessary capital into your ventures.
Limited expertise
As the sole owner, you may face limitations in expertise compared to corporations with easy access to diverse skill sets. Collaborative efforts, such as networking with industry professionals, seeking mentorship, or even outsourcing specific tasks to experts, can help compensate for your limitations.
Business continuity challenges
Whether due to illness, personal obligations, or other unforeseen circumstances, the business may experience interruptions when the owner is absent. It’s particularly challenging if you’re the only one operating the company without any employees.
To prevent operations from grinding to a halt, make contingency plans, hire employees to help, and delegate responsibilities where possible. You could also talk to family or friends who can run things while you’re unavailable.
Flying High While Flying Solo
With decisions and responsibilities resting solely on you, sole proprietorship offers many advantages. However, it’s also tempered with potential pitfalls and consequences. Remember, this is just one business structure among others. You should choose the right one that suits your needs and goals. Before deciding, you can consider seeking professional advice.
At Zenith Capital, we understand the challenges sole proprietors face. Our services can help you secure a business loan in the Philippines, and we provide other solutions to achieve your goals.
Whether you want to secure an SME loan for operations or explore growth opportunities, Zenith Capital is here to support you! Contact us today for more information, or apply for a loan here.
Rizza Templonuevo is not just an accomplished finance professional and business leader, but also a loving wife and a dedicated mother of two. With a passion for helping businesses grow and thrive, she brings her extensive knowledge and expertise as Vice President of Zenith Capital Credit Group Corporation to help countless SMEs and corporations across the Philippines access the financing they need to succeed.
When she’s not busy with work, Rizza enjoys immersing herself in the worlds of fashion and social events, as well as traveling to new and exciting places.
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