Prior to 2019, individuals engaged in business typically had to register only as sole proprietors. This meant that the liabilities of the business would ultimately be borne by the proprietor. As a result, if the business became indebted and was unable to pay its creditors, the proprietor’s personal assets could be exposed.
With the enactment of the Revised Corporation Code, another form of business entity has become an attractive option for individual business owners: the One Person Corporation.
What is a One Person Corporation?
A One Person Corporation is a corporation with a single stockholder. Unlike a sole proprietorship, a corporation has a legal personality that is distinct and independent from that of its stockholder. Thus, it has a name of its own and may act as a legal person, such as by owning property or entering into contracts, subject to the limits of its corporate powers.
A typical indicator of a One Person Corporation is that its official corporate name carries the letters “OPC” at the end.
Who may form a One Person Corporation?
As a general rule, natural persons may form a One Person Corporation, except licensed professionals who seek to form a corporation for the purpose of practicing their profession, unless otherwise allowed by law. It is also not available to certain entities, such as banks, quasi-banks, pre-need companies, trust companies, insurance companies, public and publicly listed companies, and non-chartered government-owned and controlled corporations.
Aside from natural persons, a trust or an estate may also form a One Person Corporation. This may be particularly relevant where a trust is intended to hold all the shares in a corporation while keeping ownership and control structured in a more limited and organized way.
Why do sole proprietors convert to One Person Corporations?
There are several possible reasons why a person operating under a sole proprietorship may choose to convert to a One Person Corporation. Some of the major reasons are as follows:
1. Separation of liability
The separation of liability is one of the main features that makes a corporation attractive. It helps shield the personal assets of the stockholder from business creditors because a One Person Corporation is treated as a separate legal person with its own assets and liabilities.
However, to prevent abuse, the Revised Corporation Code expressly underscores the single stockholder’s burden of showing that the corporation is adequately financed in case a claim for limited liability is made. If the stockholder is unable to prove that his or her personal assets are separate and independent from those of the corporation, the stockholder may be held personally liable for the corporation’s debts.
Thus, even at the sole proprietorship stage, it is important from the outset to keep personal and business assets separate.
2. More formal business structure
A corporate set-up supports a business’s need for a clearer legal and operational structure. More than creating a clearer separation between personal and business assets, a One Person Corporation promotes greater clarity in ownership, documentation, and dealings with stakeholders.
From the outset, a One Person Corporation, like any other corporation, must be able to establish and define its capital structure. The Revised Corporation Code also requires the appointment of a Treasurer and a Corporate Secretary. It further requires the corporation to maintain proper records of its actions, decisions, and resolutions. In practice, a One Person Corporation also comes with distinct compliance obligations, including those relating to officer appointments and related-party transaction disclosures.
In practical terms, a One Person Corporation can help create a more institutionalized and disciplined framework for operating a business.
3. Business continuity
A sole proprietorship is highly exposed to the eventual death or incapacity of the owner. If there are several heirs, the assets used in the business may potentially be divided among them. In case of incapacity, operations may come to a standstill in the absence of a central operating figure.
A One Person Corporation can help minimize that disruption. Rather than the business assets being held directly by the owner, what pass to the heirs are the shares in the corporation. This may, however, eventually lead to the corporation’s conversion into an ordinary stock corporation, if the heirs choose neither to designate one of them or the estate as the single stockholder, nor to dissolve the corporation.
A more important consideration is that a One Person Corporation is required to appoint a nominee and alternate nominee. This mechanism is precisely intended to address continuity concerns. The nominee or alternate nominee steps in to take the place of the single stockholder as director and to manage the corporation’s affairs in the meantime, in the event of the death or incapacity of the single stockholder. This is particularly important in light of the practical challenges that may arise where there are no known heirs or where several heirs still need to be organized for purposes of settling the estate.
The One Person Corporation helps to provide a structure that institutionalizes a system that anticipates the possible effects of the stockholder’s death or incapacity, allowing the business to continue operating with greater stability.
4. Potential tax savings
With the amendments to Philippine tax laws, corporate income tax may be imposed at 20% or 25%, depending on the circumstances.
This opens up the possibility for a One Person Corporation, or any corporation for that matter, to be taxed at a lower rate than a sole proprietorship, which is generally subject to the graduated income tax rates applicable to individuals.
For a person earning income solely from business, a sole proprietorship with taxable income of about Php3 million for the year may result in a tax due of around Php702,500. If the same business were operated through a One Person Corporation that qualifies for the 20% corporate income tax rate, the tax due may be only Php600,000. If the resulting tax savings of around Php102,500 would more than offset the costs of maintaining a corporation, then forming a One Person Corporation may be a practical option.
That said, the example above will not apply in all cases. Some individual taxpayers may qualify for other tax treatments, including the 8% income tax option where applicable, and the applicable corporate income tax rate will also depend on whether the corporation meets the tax thresholds, including the conditions for the reduced 20% rate.
Final note
A One Person Corporation can be a useful option for business owners, but it also comes with additional compliance obligations. For small business owners, a sole proprietorship may still be the more practical choice because of its simpler structure. For more developed businesses, or for start-ups that want clearer separation from the outset, a One Person Corporation may be worth considering as a more formal and durable business vehicle.
Before converting from a sole proprietorship, it is worth reviewing not only the advantages, but also the compliance, tax, and operational implications of the change. Business owners should first assess whether the structure truly fits the business as it operates, and whether the added formality is justified by its risks, size, goals, and expected growth.
If you need assistance in forming a One Person Corporation, you may click this link to our incorporation guide or schedule a free consultation with us here.