16th Apr 2013
In doing business, there are various forms of business entities to consider, the most common forms of which are 1) single proprietorships, 2) corporations, and c) partnerships.
A single proprietorship is a business operated by a single individual. Registration of single proprietorships would take between 1-2 days, and the documentary requirements of the Department of Trade and Industry (DTI) are minimal. It is also simpler to operate because the owner of the enterprise essentially has only himself to contend with.
Despite simplicity of operations, doing business as a single proprietorship has pitfalls. The law does not afford protection to the personal assets of the entrepreneur from claims against his business. For example, if an enterprise operating under a single proprietorship is sued by one of its employees for a labor claim, the personal assets of the entrepreneur, including his house and other personal belongings, will become subject of the suit. For long-term business, a single proprietorship is also inept because there is no continuity of existence such that the business dies when its owner dies.
On the other hand, a partnership is formed where two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves. Registration of a partnership with the Securities and Exchange Commission (SEC) takes between 5-8 days and the requirements are similar to that of a corporation.
However, like a single proprietorship, a partner’s personal assets will also be subject to claims made against the partnership. Moreover, death or incapacity one of the partners will result in the dissolution of a partnership.
Another form of business entity, and arguably the safest way to conduct business, is by way of a corporation. However, registration of a corporation with the SEC is more difficult because of the documentary requirements. Furthermore, running a corporation is more complex because each corporate act must be supported by a board resolution. There are also maintenance requirements which must be submitted annually, in default of which the corporation would be subjected to fines or even cancellation of registration by the SEC.
But unlike other entities, the law affords the corporation a personality separate and distinct from that of its stockholders. This is known as the veil of corporate fiction. Hence, any claim against a corporation is limited only to whatever the corporation’s assets can satisfy. In terms of continuity, a corporation can exist even after the death of its stockholders, because of the separate personality granted to it by law.
An important business decision for any enterprise, whether new or existing, is choosing the form of business entity. Therefore, it would be wise for an entrepreneur, especially one who is just starting, to weigh as early as possible the pros and cons of each type, and perhaps for future expansion, consider what type of protection the law would afford them. It is suggested that at the onset, the entrepreneur consult a lawyer to determine the most appropriate business setup.
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