One of the crucial decisions you have to make when setting up a business is the choice of the legal structure upon which to base your business.
The term legal structure is sometimes referred to as the “ownership structure” or simply “business structure”.
Here in the Philippines there are basically four options available to you. These are:
- Sole Proprietorship. In this setup, you and the business is one the same.
- Partnership. This involves an agreement between two or more individual to engage in a business activity.
- Corporation. This is an artificial being and a legal entity separate from its members.
- Cooperative. This definition is taken in part from the Cooperative Code of the Philippines: “a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end…”
Some of you may have already heard of those types business forms, but don’t give it much thought. Each one has each own set of advantages and disadvantages; we have more about that in a separate article.
But right now, the question is: How do you know which legal structure best fits your business?
The following are five important factors you need to consider:
1. Ownership Flexibility and Control
Do you want to go it alone or with several people in a team? How much control do you want to have to influence in the direction of the company? Are you comfortable working with other decision makers?
True or false: Two heads are better than one.
2. Future NeedsHow do you see your business in some future time, say 5 or 10 years? Do you want it to continue operating even when you are already retired? Are you planning to sell it out some time so you can spend more time at the beach, swimming with the dolphins?
How does “100 years in business” sound to you? There are locally based companies in the Philippines that have reached that milestone. It’s quite an achievement for them. Kudos to the founders for thinking long-term in serving the community!
Will you be inviting outside investors to help support the business and share the success with them? Do you see it going public soon and be listed in the Philippine Stock Exchange?
These questions are worth pondering if your business is here for the long haul.
3. Cost of Formation and Recordkeeping
In general, the more complex the legal structure, the more expensive it is to set up and the more time required to administer the business. You have to factor this in during the start-up phase, especially if monetary assets are hard to come by.
4. Legal Liability
How high is the potential of your business to incur liability?
In a sole proprietorship, you are also personally liable for whatever liabilities incurred by the business. That’s very scary if something really goes wrong. Naturally, you want to protect yourself against too much exposure to risks and lawsuits as a result of doing the business activity.
5. Tax Implications
You have to look at this in the light of your business goal and your individual situation.
Which business structure has favorable tax advantages? It is wise to avoid taxes, or defer its payment as much as possible. This must not confused with tax evasion.
If this part is really important, and it will be in sooner or later,
you should hire a professional on board who is an expert on Business Taxation in the Philippine setting.
For most people, the choice of business structure is very clear from the start. For others, the questions posted above would take a long time to answer and that’s a good sign that you are not careless in going about it.
There is no right or wrong answer here. Only you can answer those. You be the judge. After all, it’s your own business.