Going solo with limited liabilities

Published in Daily Tribune on December 15, 2022
by: Jose Roger O. Arroz

Considering that micro, small and medium enterprises comprise most of the businesses in the Philippines, the introduction of the One Person Corporation or OPC is a game-changer. Setting up a “sole proprietorship” used to be the only option for entrepreneurs operating solo.

Now, under the Revised Corporation Code of the Philippines of 2019, a corporation with only one stockholder, which may be a natural person, a trust, or an estate, may now be established. This departs from the old Corporation Code, which required a minimum of five stockholders who must all be natural persons, to create a corporation.

The OPC grants the entrepreneur complete control and authority to manage his business through a corporate vehicle. The OPC is empowered to issue resolutions without the need of seeking consensus and approval from a board of directors because the single shareholder is the sole director and president of the OPC. Nevertheless, the single stockholder is enjoined to appoint another person to act as the OPC’s corporate secretary as he/she is prohibited by the RCC from being appointed as such.

The selling point of OPCs is the creation of a legal entity that is separate and distinct from the single shareholder. Clearly, it offers the best of both a single proprietorship and a regular corporation to individuals who seek to conduct their business independently while enjoying a distinct legal personality for their business endeavors. The liability of the single shareholder shall be limited to his subscription to the corporation (Sec. 130, RCC). Unlike sole proprietorships and partnerships, the personal assets of the single shareholder are not exposed to creditors, or other similar claims, unless there is ground to pierce the veil of corporate fiction.

However, to claim limited liability, the single stockholder should be able to prove that the OPC is adequately financed and that the property of the OPC is separate from his personal properties.

Otherwise, Sec. 130 of the RCC will make the stockholder jointly and severally liable for the debts and liabilities of the OPC which would allow creditors to claim payment from the personal assets of the single stockholder. These provisions allow the entrepreneur to consider engaging in long-term transactions and investments, while also reasonably protecting the interest of the OPCs’ creditors.

This business structure is likewise accessible to foreign investors who are natural persons. In cases of natural persons, it is sufficient under the RCC that he or she must be of legal age. The Securities and Exchange Commission clarified in Sec. 15 of MC No. 7 s.2019, that there is no provision on any nationality requirement. Thus, a foreign natural person may organize an OPC subject to the applicable constitutional and statutory restrictions on foreign participation in certain investment areas or activities.

OPCs tend to better ensure business continuity. Under Sec. 124 of the RCC, the single shareholder is required to designate a nominee and an alternate nominee who shall, in the event of the single stockholder’s death or incapacity, take the place of the single shareholder as director and shall manage the corporation’s affairs. This suggests that an OPC structure tends to be more insulated from sudden disruptions brought about by the keyman’s death and incapacity, thus an ideal tool for business succession planning.

The downside of OPCs, however, lies in the intricacies of the paperwork for their establishment and maintenance. Head-to-head, sole proprietorships tend to be simple and more straightforward. One must also consider the tax consequence in organizing an OPC. The current Philippine Tax Code treats OPCs as regular corporations (30 percent). Whereas income received by single proprietors from their business is subject to the graduated income tax rates for individual taxpayers.

The OPC is another practical alternative for entrepreneurs who currently operate on a mainly independent set-up. In the final analysis, the decision on the kind of business structure to adopt must be made on a circumspective and case-to-case basis. It is strongly advised to confer with a legal professional to review, analyze, and evaluate his requirements to come up with the most efficient structure bespoke to the entrepreneur’s needs.

Read more: https://tribune.net.ph/2022/12/15/going-solo-with-limited-liabilities/

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