Should I Set Up A Corporation For My Business

Should I Incorporate? FAQ (v.2022-1)

Q: My business is growing! Should I make a corporation? What are the advantages of having a corporation?

A: Incorporating is a judgment call of the business owner. It is not a necessary step for SMEs. Some advantages are: segregate/protect personal assets from liability, an existing governance structure for group investments, ease in selling or infusing additional investment.

Q: Why is it not a necessary step?

A: An entrepreneur has the choice of running his/her business as a sole-proprietorship, a partnership or a corporation. Trivia: Companies in the Philippines were ‘incorporated’ as Sociedad Anonima (SA) before the United States brought the concept of corporations into Philippine Law.

Q: What is a sole proprietorship?

A: It is a form of business that is an alter-ego of the business owner. The business person in a sole proprietorship maintains full control and ownership of all assets. The main downside is that the liabilities of the business and owner are also one and the same. There is no segregation or protection of personal property.

Q: What is a partnership?

A: A partnership is a form of business that is owned by several individuals. Partnerships are rarely used for business endeavors because the liabilities of a partnership can extend to the personal assets of the partners. In present day, this entity is more often used by regulated professions. Professionals such as architects, engineers, lawyers and doctors are not allowed to create corporations for their practice, and may only create partnerships.

Q: How do I decide on whether to incorporate or not?

A: One situation that make incorporation ideal is if you have multiple investors with different roles. The Corporation Code already provides the entire governance structure to protect the interest of all the investors.

Q: What is the downside of incorporating?

A: Incorporating requires additional paperwork, some additional expenses and recurring annual reports. You will also need to be familiar with the framework of a corporation specially when interacting with third parties like banks.

Q: What do you mean by the ‘framework of a corporation’?

A: In general, the corporation is controlled by the board of directors, who are elected by the stockholders in an annual meeting. If you open a bank account, the bank usually requires a certification from the corporate secretary to know who the signatories are and that the board resolved to open a bank account.

Q: What if I want to run my business by myself, but also want a corporation?

A: You can put up a “One Person Corporation” or OPC.

Q: What are the advantages of an OPC?

A: You have the same advantages as a regular corporation, the primary of which is a limitation on liability (segregated personal assets and liabilities). However, there are more reportorial requirements for an OPC.

Q: How do I incorporate?

A: Visit the website of the Securities and Exchange Commission. A lot of effort has been put in to make incorporation simple. The process is almost completely online. However, if you are in a highly regulated business, or if you are having difficulties in getting your incorporation approved, it is recommended that you consult with a lawyer on how to register.