The change of legal structures in Philippines and its consequences
At the beginning, some owners might opt to start their new businesses under a Sole Proprietorship form in the Philippines. It can be quicker, more efficient and less paperwork to get a business up and running under a Sole Proprietorship. Once the business is developed, owners can decide that the registration of a corporation suits better for the future.
The change of legal structures has some consequences in terms of legal, administrative, tax and accounting points of view that can be described below.
The main reasons to change From Sole Proprietorship to Corporation
Generally, the different common reasons that prevail to change from Sole Proprietorship to a Corporation are :
- Limited Liability: The owner of a sole proprietorship will be personally liable for any debts of the business. The owner is also liable to be sued for business-related activity, while in a Corporation, however, the responsibility is separated from its owners. Any legal action against the business would generally be taken against the Corporation. In summary, a Corporation provides more protection personally for the owners or shareholders.
- Investment: A Sole Proprietorship will have just one owner. If the owner wishes to bring on investors or start issuing shares to additional partners, they cannot do so under a Sole Proprietorship. A Corporation does, however, enable multiple shareholders (i.e. multiple owners) with different levels of shareholding/ownership which can be helpful to start bringing money into the business and enabling growth.
- Financing: A Corporation is generally a more attractive vehicle for investors, financiers and other parties that might be interested in providing finance to a business. In general, banks and corporate lenders are more likely to want to lend or enter into a commercial relationship with a Corporation than a Sole Proprietorship.
- Legitimacy: Setting up and running a business through a Corporation can provide a greater level of legitimacy and professionalism from the perspective of both the general market and various stakeholders (customers, suppliers, media, partners, investors, etc).
In particular, there are a number of accounting and finance topics that have to be considered when making the move to ensure that the new Corporation is set up correctly and that the actual transition of the business to the Corporation is as smooth, efficient and compliant.
New Tax Compliance Requirements
A New set of tax and compliance requirements will be applicable to the new entity once registered which are more complex than for a sole entrepreneurship. In the Philippines, corporate and tax compliance are regulated by the SEC and the BIR.
New Customer Invoices
The invoices must reflect the details of the new Corporation. Customers must be aware that invoices will now be issued by a different entity : owners should not just continue issuing the same format of invoices that they were issuing with the Sole Proprietorship. The main consequences are:
- It is quite important for final customers as well as for suppliers to be informed about the change of legal name of the entity.
- BIR requires that Corporations selling goods issue a BIR-approved Sales Invoice for every sales transaction. The new Corporation will have to apply for new invoices from the BIR upon registration.
- From an accounting and bookkeeping perspective, the corporation must keep track record of the correct supporting documentation to evidence all sales and purchases. This is important for tax compliance, accounting process and statutory audit that must be conducted each year.
- The issuing of customer invoices is a key element of the tax and compliance framework in the Philippines. As such, it is crucial for businesses to ensure that they are complying with their invoicing requirements and achieving 100% compliance.
New Customer Contracts
It is important to inform the final customers that the engagement will now be with the Corporation. It is requested all customer contracts are transferred to the new Corporation. It is preferable that both parties agree and sign up to any changes of existing contracts.
New Employment Contracts & Benefits
New employment contracts will need to be signed by all employees and the new Corporation.
In addition, it is required to proceed to the change to the different social charges organisms:
- a new HMO provider will also have to be engaged by the Corporation to ensure the employees are still covered.
- DOLE/SSS/Pag-IBIG/PhilHealth: The new Corporation will need to ensure that the employees are fully registered under the new Corporation with each of the mandatory government agencies.
- Length of Service: Employees will gain benefits and rights based on their length of service with a company. Under any transition, employees are likely to want to retain any prior service that they had under the Sole Proprietorship.
Transfer of Assets
A business asset refers to all tangible and intangible resources owned by a business such as cash, inventories, furniture, equipment, plant and machinery. The transfer of any business assets to the Corporation must be accurately reflected in the Books of Accounts of the two entities.
Transfer of Lease Contracts
If the business is moving from Sole Proprietorship to a Corporation while using the same address, the tenant will have to inform the landlord to change the contract in order to reflect the Corporation as the new lessee.
The continuation of the Sole Proprietorship
While the business is now running through the Corporation, the Sole Proprietorship entity still exists from the legal and tax points of view, until it is closed officially or made dormant.
Opko Finance, an accounting and outsourcing services company based in Asia and managed by a French expatriate, helps Start up, SME, Entrepreneurs, subsidiaries of big companies to set up and develop their business in the best hubs in Asia and Middle East, faster and with fewer resources through outsourcing solutions in the Philippines.
For any information on the change of the legal structures in the Philippines, please contact our team to info@opkofinance.com.
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