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Single and ready to incorporate.

It is important to note the tax and corporate implications of the One Person Corporation (OPC), which are under the specific guidelines released on May 6, 2019, to implement this new provision under the Revised Corporation Code.

In terms of income tax rate, an OPC has a flat 30 percent while sole proprietorships are subjected to graduated rates like other individuals. The rates for individuals go as low as 0 percent and as high as 35 percent plus base taxes. With this, it is clear that you have to accurately project the range where your taxable net income would be to see which business type is more advantageous. Unfortunately, that's easier said than done as OPC also has different deduction rules compared with what individuals have.

An example of a clear advantage, given all other things equal, is when an OPC utilizes the Optional Standard Deduction. For OPCs, the 40 percent OSD is applied on Net Revenue while for sole proprietorships it is applied on gross revenues. Basically, an OPC using OSD will be able to use its cost of goods sold as deductions on top of the 40 percent OSD.

Not to be upstaged, a sole proprietorship also has an 8-percent Gross Income Tax. This option is limited for sole proprietorships with gross sales/receipts not exceeding P3 million. The 8-percent GIT is particularly useful for smaller businesses that are subject to VAT or OPT as this tax option is in lieu of those business taxes, meaning the 8 percent covers income and percentage taxes.

It is not uncommon for some existing corporations to have five stockholders, of which four of them only hold a single share. This is what some individuals have been doing to skirt with the corporation code in order to register as a corporation. Be that as it may, the corporation is still subject to governing rules and regulations, which they have to comply. This includes submission of bylaws and provision of rights to shareholders, which you may never know may exercise them.

With trust and confidence to the shareholders not important to OPCs, individual entrepreneurs enjoy smoother business operations with a single person decision-making body. This may be a selling point for corporations who didn't have the option to register as an OPC from the beginning and just inserted random friends and relatives into the corporation to meet the five-person requirement. The same is true for sole proprietorships, but they don't have the benefit of succession.

A unique trait of an OPC is that it enjoys succession. Upon registering, the individual shareholder must name a nominee and alternate nominee. In case of death or incapacity, the nominee will take control of the management of the OPC until the rightful heirs are able to take over. In the case of sole proprietorships, the net assets of the business go their separate ways to the heirs and the continuance of the business is much harder to predict as they have to apply for a new and distinct business license.

In the long run, it may also be wise to register as an OPC from the start. If the individual stockholder is looking to grow exponentially through the help of some investors, it is much easier to convert an OPC to a regular corporation, in contrast when the starting point is a sole proprietorship. For a sole proprietorship to become a corporation, it will have to undergo transfer of assets that have tax implications as you will be required to report it at fair market value.

As thrilled as some individuals are in the advent of the OPC, they should not be hasty in deciding to register their endeavors as one. It is key to weigh the risks and benefits of an OPC and sole proprietorship and see if they fit your future plans for your business. An OPC may be better for you, but not for another. Though basically you are the single entrepreneur in either OPC or sole proprietorship, the way your business will run will be entirely different in either option.

Luke Michael Valdez is a consulting associate of UpSmart Strategy Consulting Inc., a financial consultancy firm that specializes in strategic finance, structuring and restructuring of start-ups, social enterprises and SMEs.

This column accepts contributions from accountants, especially articles that are of interest to the accountancy profession, in particular, and to the business community, in general.
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Publication:Business Mirror (Makati City, Philippines)
Date:Jun 17, 2019
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