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Marbien L.

Verano
2010-0051

Investment
Sunday/1-3pm

Atty. Reyes

Comparative Matrix
on
Form of Organizations in the United States and in the Philippines
FORM OF ORGANIZATIONS
INTRODUCTION:

UNITED STATES

PHILIPPINES

The most common forms of


business enterprises in use in
the United States are the sole
proprietorship,
general
partnership, limited liability
company
(LLC),
and
corporation. Each form has
advantages and disadvantages
in complexity, ease of setup,
cost, liability protection, periodic
reporting
requirements,
operating
complexity,
and
taxation. Also, some business
forms have subclasses, such
as the C corporation, S
corporation, and professional
corporation. Choosing the right
business form requires a
delicate balancing of competing
considerations. Learn how to
select, plan, and organize the
business form that is a perfect

After deciding to start a business


(and the particular business to
pursue), one of the important
issues is the form of business
entity that will serve as the vehicle
in pursuing the business. You may
say that the next important issue
is the source of funding, which is
correct, but that issue will be
discussed much later. Right now,
lets focus on the forms of
business.
The choice of the form of
business or business organization
depends on various factors. In
certain business, like banks, the
law requires that the business
entity must be a corporation. A
small business, like your friendly
sari-sari store, is better off as a
sole proprietorship, although it
could also be converted to
1 | Page

fit for you.1

another form of business if the


circumstances require that shift. 2

The sole proprietorship is the


simplest business form under
which one can operate a
business.
The
sole
proprietorship is not a legal
entity. It simply refers to a
natural person who owns the
business and is personally
responsible for its debts. A sole
proprietorship
can
operate
under the name of its owner or
it can do business under a
fictitious
name,
such
as
Nancy's Nail Salon. The
fictitious name is simply a trade
name--it does not create a legal
entity separate from the sole
proprietor owner.

Also referred to as single


proprietorship,
a
sole
proprietorship is the most-simple
form of business and the easiest
to register, through the Bureau of
Trade Regulation and Consumer
Protection (BTRCP) of the
Department of Trade and Industry
(DTI). It is owned by an individual
who has full control/authority of its
own and owns all the assets, as
well as personally answers all
liabilities or losses. The fact that it
is run by the individual means that
it is highly flexible and the owner
retains absolute control over it.

A. SOLE PROPRIETORSHIP

The sole proprietorship is a


popular business form due to
its simplicity, ease of setup, and
nominal cost. A sole proprietor
need only register his or her
name
and
secure
local
licenses,
and
the
sole
proprietorship is ready for
business.
A
distinct
disadvantage, however, is that

The problem, however, is that a


sole proprietor has unlimited
liability. Creditors may proceed
not only against the assets and
property of the business, but also
after the personal properties of
the owner. In other words, the law
basically treats the business and
the owner as one and the same.
This uniform treatment also has
important
tax
implications.
Partnerships and corporations
2 | Page

the
owner
of
a
sole
proprietorship
remains
personally liable for all the
business's debts. So, if a sole
proprietor business runs into
financial trouble, creditors can
bring lawsuits against the
business owner. If such suits
are successful, the owner will
have to pay the business debts
with his or her own money.

may lessen their tax liability


through a myriad of business
expenses
and
other
tax
avoidance techniques. These tax
deductions may not be applicable
to a sole proprietorship. Also, the
potential growth and reach of a
sole
proprietorship
pale
in
comparison with that of a
corporation.

The
owner
of
a
sole
proprietorship typically signs
contracts in his or her own
name, because the sole
proprietorship has no separate
identity under the law. The sole
proprietor owner will typically
have customers write checks in
the owner's name, even if the
business uses a fictitious name.
Sole proprietorships can bring
lawsuits (and can be sued)
using the name of the sole
proprietor
owner.
Many
businesses begin as sole
proprietorships and graduate to
more complex business forms
as the business develops.
i.

advantages

Owners can establish a


sole
proprietorship

It is easy to organize.
Financial capital is small,
3 | Page

ii.

instantly, easily, and


inexpensively.
Sole
proprietorships
carry little, if any,
ongoing formalities.
A sole proprietor need
not pay unemployment
tax on himself or herself
(although he or she
must
pay
unemployment tax on
employees).
Owners may freely mix
business and personal
assets.

disadvantages

Owners are subject to


unlimited
personal
liability for the debts,
losses, and liabilities of
the business.
Owners cannot raise
capital by selling an
interest in the business.
Sole
proprietorships
rarely survive the death
or incapacity of their
owners and so do not
retain value.

and
registration
requirements
are
not
difficult to comply with. In
fact, in the remote rural
areas small businesses do
not even bother to apply
for license.
The single proprietor is the
boss. He makes the
decisions
and
enjoys
substantial freedom of
action. Possibilities of
conflicts or quarrels are
minimized.
The owner acquires all the
profits from his business.
This gives him more
incentives to make his
business grow.
In general the financial
resources of a single
proprietorship are not
enough to transform the
business into a large scale
enterprise. Considering its
small assets and high
mortality rate, banks are
reluctant to grant big loans
to single proprietorship
type
of
business
organizations.
Benefits of specialization
in business management
4 | Page

Income Tax Rate

The maximum individual


tax rate is 39.6%

Capital Gains Tax

The maximum federal


income tax rate on
capital gains is 20% for
assets held for more
than 12 months (23.8%
if the net investment
income tax discussed
below applies). The
graduated rates of tax
apply to capital gains
from assets held for 12

are not present in small


scale proprietorship. There
is only one manager. In
not a few cases, the owner
is the only employee.
The owner has unlimited
liability. This means that
the owner of the business
risks not only the assets of
his small enterprise, but
also his other personal
assets like his piece of
land, bank deposits, and
other personal properties
which are not part of his
business. In case of loss,
such assets are subject to
financial
claims
by
creditors.

The maximum individual tax rate


is 32%, based of scheduler tax
system
The capital gains tax is 6% for
sale or exchange of real
properties, based on gross selling
price or fair market value,
whichever is higher.

5 | Page

months or less.
Final Income Tax

A
final
withholding
income tax of 30% is
imposed on payment to
foreign persons

A final withholding income


tax of 25% is imposed on
payment
to
foreign
persons
(non-resident
alien not doing business in
the Philippines)

B. PARTNERSHIP
A partnership is a business
form created automatically
when two or more persons
engage
in
a
business
enterprise for profit. Consider
the following language from the
Uniform Partnership Act: "The
association of two or more
persons to carry on as coowners of a business for profit
forms a partnership, whether or
not the persons intend to form a
partnership." A partnership--in
its various forms--offers its
multiple owners flexibility and
relative
simplicity
of
organization and operation. In
limited partnerships and limited
liability
partnerships,
a
partnership can even offer a
degree of liability protection.
Partnerships can be formed
with a handshake--and often

A partnership consists of two or


more
persons
who
bind
themselves to contribute money
or industry to a common fund,
with the intention of dividing the
profits among themselves. The
most
common
example
of
partnerships are professional
partnerships, like in the case of
law firms and accounting firms.
Just like a corporation, it is
registered with the Securities and
Exchange Commission (SEC).
A partnership, just like a
corporation, is a juridical entity,
which means that it has a
personality distinct and separate
from that of its members. A
partnership may be general or
limited. In a general partnership,
the partners have unlimited
liability for the debts and
obligation of the partnership,
6 | Page

they are. Responsible partners,


however, will seek to have their
partnership
arrangement
memorialized in a partnership
agreement, preferably with the
assistance of an attorney.
Because partnerships can be
formed so easily, partnerships
are often formed accidentally
through oral agreements. A
partnership is formed whenever
two or more persons engage
jointly in business activity to
pursue profit.

pretty
much
like
a
sole
proprietorship.
In
a
limited
partnership, one or more general
partners have unlimited liability
and the limited partners have
liability only up to the amount of
their capital contributions. Unlike
a corporation, which survives
even when a member/stockholder
dies or gets out, a partnership is
dissolved upon the death of a
partner or whenever a partner
bolts out.

Don't operate a partnership


without a written partnership
agreement. Because of its
informality
and
ease
of
formation, the partnership is the
most likely business form to
result in disputes and lawsuits
between
owners--oral
partnership arrangements are
usually the reason.
The cost to have an attorney
draft a partnership agreement
can vary between $500 and
$2,000, depending on the
complexity of the partnership
arrangement
and
the
experience and location of the
attorney.
7 | Page

i.

advantages

ii.

disadvantages

Owners
can
start
partnerships relatively
easily
and
inexpensively.
Partnerships do not
require annual meetings
and require few ongoing
formalities.
Partnerships
offer
favorable taxation to
most-smaller
businesses.
Partnerships often do
not
have
to
pay
minimum taxes that are
required of LLCs and
corporations.

All owners are subject


to unlimited personal
liability for the debts,
losses, and liabilities of
the business (except in
the cases of limited
partnerships and limited
liability partnerships).
Individual partners bear
responsibility for the
actions
of
other
partners.
Poorly
organized

It is also easy to organize


like single proprietorship.
Legal
red
tape
in
connection
with
its
registration is not much.
Better
management
because of the presence
or more participants in the
operations
of
the
business.
Possibility
of
bigger
resources than in the
single
proprietorship
exists.
Financial
institutions may extend
bigger loans to such
business
organization
considering the combined
resources of the partners.
Conflicts
or
quarrels
between or among the
partners regarding the
management or policies of
the business are likely to
crop up. In fact, under
Filipino
style,
some
partners cheat their other
partners in matters of
profits or expenses.
It lacks stability. The death
or withdrawal of one
8 | Page

partnerships and oral


partnerships can lead to
disputes among owners.

Income Tax Rate

The effective tax rate is


23.6% 3

partner
dissolves
the
partnership. To continue
its operation, a complete
reorganization is needed.
Like the single proprietor,
the partners are also
subject
to
unlimited
liability, except the limited
partners. Such partners,
liabilities are only confined
to their share of capital
contributions in the form of
cash or property.
It
is
taxed
as
a
corporation,
except
general
professional
partnership. The income
tax rate is 30%.

C. LIMITED LIABILITY COMPANY (LLC)


The limited liability company
(LLC) is America's newest form
of business organization. There
is little historical precedent for
LLCs. They are essentially
creations
of
the
state
legislatures, although some
commentators trace the origin
of the LLC to a 19th century
form of business organization
called
the
partnership
association,
or
limited

Not applicable in the Philippines

9 | Page

partnership association. The


great bulk of laws authorizing
LLCs in the United States were
passed in the 1980s and
1990s. Wyoming passed the
first law authorizing the LLC in
1977. Florida followed in 1982.
The watershed event in the rise
of the LLC was a 1988 Internal
Revenue Service ruling that
recognized partnership tax
treatment for LLCs. Within six
years, 46 states authorized
LLCs as a business form. By
1996, Vermont, the last state to
recognize LLCs, had an LLC
statute in place.
The LLC is often described as a
hybrid
business
form.
It
combines the liability protection
of a corporation with the tax
treatment
and
ease
of
administration of a partnership.
As the name suggests, it offers
liability protection to its owners
for
company
debts
and
liabilities.
Simplicity and
Flexibility
While LLCs are essentially new
creations of state legislatures,
corporations are truly ancient-and today's corporate law still
10 | P a g e

carries
some
unwanted
baggage.
The
modern
American
corporation
has
antecedents that date to
Roman times, inherited by us
through English law. The basic
principles
of
American
corporate
law
have
not
changed
significantly
in
centuries. Probably the single
greatest disadvantage of the
corporate
form
is
the
burdensome
range
of
formalities
that
corporate
managers must observe. A
modern corporation's heavy
administrative burden is a
remnant of the more traditional
and formal legal system under
which corporate law was
cultivated.
The LLC changed all that. The
LLC
offers
the
liability
protection benefits of the
corporation
without
the
corporation's
burdensome
formalities. It is this simplicity
that has made the LLC an
instantly popular business form
with businesspersons operating
smaller companies.
Another attractive feature of
11 | P a g e

LLCs that we will discuss


throughout this book is their
flexibility. LLC management can
elect to be taxed either as
partnerships or as corporations.
An LLC can be managed like a
partnership
(a
membermanaged LLC) or like a
corporation (manager-managed
LLC). LLCs can create a board
of directors, and can have a
president and officers just like a
corporation. LLCs can choose
to have periodic meetings of
their membership, or they can
choose
to
ignore
such
formalities altogether.
Potential Disadvantages of
the
LLC
The LLC does carry some
disadvantages that make it an
undesirable business form for
some purposes. The limited
liability company is a new
business form, and courts have
not yet developed a body of
legal
precedent
governing
LLCs. Thus, LLC owners and
professionals
may
face
operating questions and issues
for which they have little or no
legal guidance. That said, this
concern lessens as the states
12 | P a g e

develop a reliable body of law


concerning LLCs, and is no
issue at all for very small
companies. Furthermore, for
companies that wish to pursue
venture capital, accumulate a
large number of shareholders,
and/or eventually pursue an
initial public offering, the LLC is
not an appropriate alternative to
a
corporation.
Venture
capitalists and angel investors
tend to shy away from investing
in LLCs. That may change in
the future, but today all large,
publicly-held companies are
corporations, not LLCs.
What should the owners of an
LLC do if their company grows
in size such that an LLC is no
longer the appropriate business
form? The answer is simple: it
is possible to convert an LLC
into a corporation. Thus, some
small companies begin life as
LLCs, outgrow the LLC form,
and then the LLC's owners
transfer the assets of the LLC
to a newly formed corporation
with the same owners as the
LLC. Thereby, the LLC is
converted to a corporation. We
have included some sample
13 | P a g e

conversion
forms
in
the
appendix. Furthermore, as one
might imagine, it is also
possible
to
convert
a
corporation into an LLC, or
nearly any business form into
any other. It is also possible to
reorganize a business in
another state by transferring
the assets of a business into a
newly
chartered
entity.
Converting business forms
does
require
some
sophisticated legal and tax
analysis and should not be
attempted without the services
of a qualified attorney and
accountant.
The cost of setting up an LLC is
roughly equivalent to setting up
a corporation. The secretary of
state's fees for filing articles of
organization and for filing
annual reports are often the
same for both LLCs and
corporations. Organizers who
wish to seek help in organizing
an LLC through an LLC
formation service or through an
attorney will find the fees to be
roughly the same.
i.

Advantages

LLCs do not require


14 | P a g e

ii.

disadvantages

annual meetings and


require few ongoing
formalities.
Owners are protected
from personal liability for
company debts and
obligations.
LLCs enjoy partnershipstyle,
pass-through
taxation,
which
is
favorable to many small
businesses.
LLCs do not have a
reliable body of legal
precedent
to
guide
owners and managers,
although LLC law is
becoming more reliable
as time passes.
An LLC is not an
appropriate vehicle for
businesses seeking to
become
public
eventually, or to raise
money in the capital
markets.
LLCs
are
more
expensive to set up than
partnerships.
LLCs usually requires
annual
fees
and
periodic filings with the
state.
15 | P a g e

Some states do not


allow the organization of
LLCs
for
certain
professional vocations.

D. COOPERATIVE
Not Applicable

It is an organization composed
primarily of small producers and
consumers who voluntarily join
together
to
form
business
enterprises
which
they
themselves own, control and
patronize.
A cooperative is also defined as a
duly registered association of
persons, with a common bond of
interest and have voluntarily
joined together to achieve a lawful
common social or economic end,
and
making
equitable
contributions to the capital
required and accepting a fair
share of the risks and benefits of
the undertaking in accordance
with
universally
accepted
cooperative principles.

I.

Advantage

Elimination of middlemen.
The management of the
consumer
cooperative
society directly purchases
the finished goods from
16 | P a g e

the manufacturer and


producer.
Producer
cooperative
society
procures the raw material
from the producer. Thus
they try to free themselves
from the grip of the
middlemen and make the
goods
available
to
consumers at lower prices.
Saving in management
expenses.
Cooperative
society
enjoys
some
economies in the field of
management
due
to
voluntary
services
performed
by
the
members
themselves.
Thus, it is possible to
minimize the expenses of
management
and
supervision.
Minimum stock. Society
purchases
the
same
goods which are actually
demanded
by
its
members. Thus there is
need to have minimum
stock at hand due to
constant
and
regular
demands.
Economy in distribution
and
production
expenditure. Society is
17 | P a g e

II.

Disadvantage

saved
from
any
distribution and production
expenses. It has got its
regular
customers;
therefore society has not
to face any trouble for
marketing its goods. Thus
is has not to incur any
expenditure for publicity
and advertisement, which
is a big item in the budget
of the capitalist producer.
Integration. Under this
type
of
organization,
complete
integration
between
producers,
wholesalers and retailers
is always possible. This is
thus a clear advantage
over capitalist economy.

Lack of capital.
a)
Its members are
generally related to the poor
group of the society and they are
not in a position to invest a large
amount.
b)
External financial
resources of the society are
limited.
c)
It cannot borrow
money from non-members.
d)
It cannot issue any
kind of debentures.
18 | P a g e

e)
It share cannot be
transferred to nonmembers.

It thus suffers shortage of


capital for the operation of
business.
Limited scale. Due to the
various hindrances behind
the growth of capital, it is
not possible for the
cooperative society to start
its business at a large
scale; it therefore, keeps
its business limited in the
narrow
field
of
cooperation.
Inefficient
management.
Expert
and
efficient
management is important
factor for running the
business successfully. But
a society cannot afford to
hire the services of
superior abilities due to its
limited
resources.
Therefore its business
cannot be carried on
smoothly.
Lack of prompt decision.
As all the matters are
decided
by
the
management committee
and complied by another
authority, it cannot act with
19 | P a g e

promptness, if a chance
comes to make a timely
purchase or sale, they
have to wait to get others
consent.

Income Tax Rate

Exempt from income tax.


Except in the event that
the operation is no longer
for the benefits of the
members. Meaning that he
cooperative is already
doing business like the
ordinary business. At that
point, the income and
revenues related to the
operations
outside
its
primary purpose is taxable
like a corporation. The
income tax rate is 30%.

E. CORPORATION
The term corporation comes
from the Latin corpus, which
means body. Historically, in
England, the term corporation
was also used for the local
government body in charge of a
borough. A corporation is a
body--it is a legal person in the
eyes of the law. It can bring
lawsuits, can buy and sell
property, contract, be taxed,

A corporation is a juridical entity


established under the Corporation
Code and registered with the
SEC. It must be created by or
composed of at least 5 natural
persons (up to a maximum of 15),
technically called incorporators.
Juridical persons, like other
corporations
or
partnerships,
cannot be incorporators, although
they may subsequently purchase
20 | P a g e

and even commit crimes.


Its most notable feature: a
corporation protects its owners
from personal liability for
corporate
debts
and
obligations--within limits.
A corporation has perpetual life.
When shareholders pass on or
leave a corporation, they can
transfer their shares to others
who
can
continue
a
corporation's
business.
A
corporation is owned by its
shareholders, managed by its
board of directors, and in most
cases operated by its officers.
The shareholders elect the
directors, who in turn appoint
the corporate officers. In small
corporations, the same person
may serve multiple roles-shareholder,
director,
and
officer.
Corporations are ideal vehicles
for raising investment capital. A
corporation seeking to raise
capital need only sell shares of
its stock. The purchasing
shareholders pay cash or
property for their stock, and
they then become part owners
in the corporation. Of course,

shares and become corporate


shareholders/stockholders.
The liability of the shareholders of
a corporation is limited to the
amount
of
their
capital
contribution. In other words,
personal assets of stockholders
cannot generally be attached to
satisfy the corporations liabilities,
although
the
responsible
members may be held personally
liable in certain cases. For
instance, the incorporators may
be held liable when the doctrine of
piercing the corporate veil is
applied. The responsible officers
may also be held solidarily liable
with the corporation in certain
labor cases, particularly in cases
of illegal dismissal.
The biggest businesses take the
form of corporations, a testament
to the effectiveness of this
business
organization.
A
corporation, however, is relatively
more difficult to create, organize
and manage. There are more
reportorial requirements with the
SEC. Unless you own sufficient
number of shares to control the
corporation, youll most likely be
left with no participation in the
21 | P a g e

the sale of corporate stock is


heavily regulated by the U.S.
Securities
and
Exchange
Commission and by state
securities laws.

management. The impact of these


concerns, however, is minimized
by the
army of
lawyers,
accountants and consultants that
assist
the
corporations
management.

A corporation's shareholders,
directors,
officers,
and
managers
must
observe
particular formalities in a
corporation's operation and
administration. For example,
decisions
regarding
a
corporation's
management
must often be made by formal
vote and must be recorded in
the
corporate
minutes.
Meetings of shareholders and
directors must be properly
noticed and must meet quorum
requirements.
Finally,
corporations must meet annual
reporting requirements in their
state of incorporation and in
states where they do significant
business.
ii.

advantages

Owners are protected


from personal liability for
company debts and
obligations.
Corporations have a
reliable body of legal
precedent
to
guide

A member has unlimited


liability. In case the
corporation
becomes
bankrupt, only the capital
contributions
of
the
members are affected.
The
other
personal
22 | P a g e

owners and managers.


Corporations are the
best vehicle for eventual
public companies.
Corporations can more
easily
raise
capital
through the sale of
securities.
Corporations can easily
transfer
ownership
through the transfer of
securities.
Corporations can have
an unlimited life.
Corporations can create
tax
benefits
under
certain circumstances,
but
note
that
C
corporations may be
subject
to
"double
taxation" on profits.

properties
of
the
stockholders
of
a
corporation are excluded
from financial claims of
creditors
of
the
corporation.
It has the most effective
means of raising money
capital for its operations,
by selling stocks and
bonds.
Stocks
are
certificates of ownership
while
bonds
are
certificates
of
indebtedness. These are
financial institutions which
specialize in helping a
corporation
sell
its
securities (stocks and
bonds).
It
has
permanent
existence. The life-span of
a corporation is 50 years,
and subject to renewal for
another 50 years. The
death withdrawal of some
officers and members
does
not
affect
the
existence
of
the
corporation.
The
corporation can easily get
officers or managers from
inside or outside the
organization. Transfer of
23 | P a g e

iii.

disadvantages

Corporations
require
annual meetings and
require owners and
directors to observe
certain formalities.
Corporations are more
expensive to set up than
partnerships and sole
proprietorships.
Corporations
require
annual
fees
and
periodic filings with the
state.

corporate ownership may


take place any time
through a sale of stocks,
but this does not disrupt
the
continuity
of
a
corporation. As a legal
entity, the life of a
corporation is independent
from its owners and
officials.
It is capable of getting the
most
efficient
management considering
its huge resources and
large scale-corporations.
It is not easy to organize
a corporation. Aside from
complying with capital
requirements, there is
much paperwork involved
in securing a charter. A
charter is a written
document which contains
the
objectives
and
activities
of
the
corporation, among other
things. It takes a longer
time
to
secure
the
approval of the Securities
and
Exchange
Commission
regarding
the
organization
and
operation
of
a
24 | P a g e

corporation.
Abuses of corporation
officials are likely to
emerge
in
situations
where many stockholders
do not participate actively
in the affairs of their
corporation. Not a few
stockholders
do
not
exercise their voting rights
during
important
meetings. Either, they are
absent or they let others
cast their votes (proxy
voting).
Examples
of
abuses
of
corporate
officials are large salaries
and fat allowances for
them.
Some corporations are
engaged in questionable
activities. For instance,
they
sell
worthless
securities; they pollute the
environment;
or
sell
substandard goods. In
short, they do not comply
with
their
social
responsibility.
There
is
a
very
impersonal
or
formal
relationship between the
officers and employees of
a corporation. In the case
25 | P a g e

of single proprietorship
and partnership, constant
and
close
contact
between owners and
employees create a very
personal and friendly
atmosphere. Everybody
knows everybody. In a
giant corporation, it is not
possible for the president
or the board chairman to
meet personally all his
employees in a year. His
very valuable time is
devoted to planning and
decision making.
Income Tax Rate

30% Corporate Income


Tax Rate 4
For corporations other
than
C
and
S
Corporations,
An
Alternative
Minimum
Tax of 20% is imposed.5
Branch profit tax of 30%
is imposed

The tax rate is 30%.


For
branch
profit
remittance tax, the tax rate
impose is 15% of the
amount remitted.

26 | P a g e

1Michael Spadaccini, https://www.entrepreneur.com/article/200516


2Atty.Fred, http://jlp-law.com/blog/forms-of-business-sole-proprietorship-partnership-corporation/
3Quantria Strategies, LLC, https://www.sba.gov/sites/default/files/rs343tot.pdf
4PricewaterhouseCoopers LLP, https://www.pwc.com/us/en/tax-services/publications/assets/doingbusiness-in-the-us-2014.pdf
5Supra to 1