One-person corporation vs single proprietor

If you are an entrepreneur, and you faced the mirror, talked to yourself to arrive at a business decision, and made a note about what you resolved all by yourself, then you just demonstrated compliance with the rules for a one-person corporation (OPC) – an exciting new juridical entity created under the freshly amended corporation code.

The OPC used to be limited only to religious corporations where the chief archbishop, rabbi, or presiding elder of the religious denomination, sect or church can apply for and become a sole corporation. Before, the nearest recourse was just to be a single proprietor, or organize a corporation and admit four other persons with an ownership of one share each.

Today, any single proprietor (or even anyone with a non-profit endeavor) can become a corporation. No need for four other incorporators. No need for a board of directors. It can be a one-man show – subject only to disclosing the name of the corporation along with the label “OPC.”

Is it worth being organized as an OPC versus a single proprietor? This is not rocket science, read on:

1. Liability. An OPC has a separate juridical personality from its individual owner. The value of this is that a juridical person is only liable to the extent of its assets. So if it loses money, or is sued, and it does not have money to pay, the creditor or claimant loses. It is judgment-proof outside of the assets invested in or owned by the corporation (the owner used fraud to take advantage). A single proprietor, on the other hand, is directly liable as the businessman and the private person are one and the same human individual. So a single proprietor can be made liable up to his boxer shorts, so to speak.

2. Tax. An OPC has better access to the standard optional deduction of 40 percent for income tax purposes. A corporation can deduct direct costs first, then deduct the 40 percent optional deduction from its gross income. An individual in business, on the other hand, can deduct the 40 percent optional deduction only from its gross revenue or sales. Both can use the itemized deduction and they are even in that respect. But a corporation wins over an individual if they both use the optional deduction because a corporation is also able to deduct the cost of goods or cost of service. The only advantage of a single proprietor is when it has a small revenue not exceeding P3 million as it can be subject to a final tax of eight percent, compared to a corporation’s 30 percent income tax plus percentage tax or VAT.

3. Succession. When the single proprietor dies, the assets of his business (as well as the liabilities) are passed on to his children or heirs – but not the license over the business, which expires along with the individual businessman. If the children or heirs want to continue the business, they must secure a new license to do business. With an OPC, succession and business continuity are so much better. Under the new corporation code, a corporation’s life is now perpetual. This perpetuity is preserved even if the OPC owner is a mortal.

Here is how it works: the OPC owner, as early as the application for registration, designates a nominee and an alternate nominee, as required by the SEC. In the event of death or incapacity of the OPC owner, the nominee takes over to run the business, temporarily, to allow for smooth turnover of the business and powers to the heir who is interested to continue the business. There is no need to register a new corporation or business for the heir who takes over.

4. Growth and Longevity. If a single proprietorship, that is getting bigger, would later wish to change its form of business to a corporation, it can be done. However, cessation of business as a single proprietorship or the transfer of assets to a regular corporation can have tax costs. On the other hand, without changing its registration or disturbing continuity of life, an OPC can change into a regular corporation where it can receive investors or admit strategic partners. All the OPC needs to do is to amend its articles of incorporation to follow the required governance for regular corporations, such as having a board of directors (which should not exceed 15) and having regular stockholders’ meetings.

It could also be the other way around. A rich owner of an OPC may wish to acquire regular corporations and be a one-man show in such acquired ventures. The regular corporations can be converted to an OPC, no problem.

If there is anything to watch out for regarding OPCs, it’s that it can also be used for non-profit purposes, like foundations. And since the world is not bereft of shrewd individuals or bad people, the OPC can be more easily used as a vehicle to take advantage of the trust of those the corporation deals with. This is not easy to do if, for instance, one approaches for solicitations as a single person/philanthropist. So we expect the SEC to protect the public on this potential use of OPCs, in addition to money laundering and terrorist money concerns.

The positive impact, however, of OPCs is immense, especially in the Philippine business environment, where an estimated 95 percent consist of MSMEs, and a substantial but unverified number accounts for the unregistered economy. There is also the aspirational factor – the pride in owning a corporation with one’s name or personal brand.

I was discussing with a female lawyer of the firm and challenged her to set up her “Corporation Aimee, OPC” even if the primary purpose of the corporation is just the preservation of self-beauty. That may have been said in jest but the point is, who would say that one’s venture is not viable just because it’s untested? The OPC is what I would call the synonym of a “good start.”

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Alexander B. Cabrera is the chairman of the Integrity Initiative Inc. (II Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. He is also the chairman and senior partner of Isla Lipana & Co./PwC Philippines. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.