A sole proprietorship is a business with a single owner. The business is not registered as a corporation, partnership, or limited liability company. A sole proprietor can operate a small or medium business or be an independent contractor. It is sometimes referred to as a sole trader. A sole proprietorship is the most accessible type of business to establish; hence they are popular with sole owners of businesses, individual or independent contractors, and consultants. Many small sole proprietorship example businesses start as sole traders and either remain this way or expand to a corporation or a limited liability entity.
Sole Proprietorship: How It Works
In the Philippines, like any business, a sole proprietorship must apply and register with the Department of Trade and Industry (DTI) and the municipal or city hall for the mayor’s permit and business permit. If you have employees, you need to register them with SSS, PhilHealth, and Pag-Ibig. Even if it’s the most accessible business to set up and run, things need to be done and run legally.
Unlike a corporation, LLC, or LLP, a sole proprietorship example business cannot create a separate legal entity. Thus, the business owner is not exempt from liabilities incurred by the business. For instance, if the sole proprietorship incurs debts, it is also the owner’s debt. On the other hand, all profits flow directly to the business owner.
Here in the Philippines, many home-based sole proprietorships have started as one-person businesses because of the rise of work-from-home situations due to the pandemic. These businesses must only be licensed and registered if the business expands or transitions for more extensive coverage.
Owned by one person
Owned by two or more people
Owned by shareholders
Owned by members
Unlimited personal liability
Partners share liability
Income and Business Tax
Income taxed as personal income of partners
Double taxation (corporate and shareholder level)
No tax on earnings passed through to members
Personal funds, loans
Personal funds, loans, profits shared among partners
Can raise capital through selling stock
Managed by owner
Managed by partners or appointed managers
Managed by a board of directors
Managed by member-elected board
Sole Proprietorship Advantages
All income generated by a sole proprietorship is only subject to a single layer of income tax and, in some cases, may be eligible for a tax deduction. Aside from this, sole proprietorship corporate tax rates have been slashed, and a tax break for qualified businesses make the business eligible for a tax deduction. All these tax cuts are enormous savings for the business owner.
Although sole proprietorships still need to be registered at the barangay level, with DTI, and city hall, there is less paperwork than partnerships, LLCs, and LLPs.
The tax process is more straightforward.
There must be more paperwork when a sole proprietorship applies with the Bureau of Internal Revenue (BIR). Business owners can use their TIN and SSS numbers to pay taxes.
No need for a checking account
A sole proprietorship is not required to open a business checking account. All financial business can be conducted through the business owner’s account.
Sole Proprietorship Disadvantages:
1. A sole proprietorship has no legal or liability protection for the business owner. In contrast, LLC or LLP businesses have liability protection against creditors seizing personal assets such as homes.
2. Sole business owners may need help to obtain capital through lines of credit or bank loans because there is no liability protection and a lack of issuing equity. Banks tend to favor businesses with a proven track record. They view startup businesses with a small balance sheet as high-risk borrowers.
Example of Sole Proprietorship in the Philippines
It is a sole proprietorship example business that doesn’t need registration or licensing. Many teachers, in fact, moonlight as educational tutors wherein they maintain one or two student-clients. It is also a perfect fit for educators who want to go full-time as tutors with a clientele list similar to freelancing. There is little or no liability for being a tutor since all business transactions are done between parents and the tutor, and tutoring sessions are done at the student’s private home.
Opening a small neighborhood bakery makes this an excellent sole proprietorship example business because of its stability and low liability potential. You will need insurance to cover risks like food illnesses and work-related accidents like slips or falls.
You can start a sole housekeeping business as a sole housekeeper/owner or have two or three other housekeepers/employees. It would help if you found homes or offices to clean and established a regular clientele list. It may be challenging initially, but if you’re starting independently, you don’t need to pay for help immediately. Most clients may already have home insurance to cover any potential liability, but you still need your insurance. When the business and clients increase, the business may need to transition to an LLC because of the growing number of employees.
Plumbers who work for themselves are sole proprietorships, similar to freelancing. The more experienced and long-running plumbers have gotten insurance for limited liability coverage. Starting a plumbing business is hard at first because of the long-standing trust that needs to be established, especially with new clients. If the business expands and more employees are hired, the business will need to transition to an LLC.
Many photographers start by taking pictures or videos at weddings, graduations, special events, and specific purposes such as class pictures, family portraits, and marketing materials. Some eventually establish their studios while still covering external locations and events. Many even start part-time or as a hobby. With a studio, a sole proprietorship needs to be registered. It becomes useful when business expenses for travel and equipment are involved since these can be deducted from their tax return. This business is low-risk and carries little liability.
A bookkeeping business is a sole proprietorship example business that can either be registered or not. Instead of other businesses hiring their accountant, a bookkeeper can cater to their financial needs by posting the business’s revenue, expenses, and other financial data for the accounting system. The financial information maintained by the bookkeeper is essential because it is used to prepare the business’s tax returns, especially if it is a partnership, LLC, or LLP.
Landscaping and gardening
A gardener and landscaper can start as a sole proprietorship and eventually hire a small team of similar gardeners and landscapers. They can maintain lawns, plants, flower beds, and trees of homeowners and businesses. Eventually, when the business expands, it can start working with commercial customers for extensive landscaping or gardening projects. It means hiring more employees and eventually transitioning the business to an LLC.
How to Start A Sole Proprietorship Business in the Philippines
Starting a sole proprietorship in the Philippines involves several steps, each with its requirements and costs. Here’s a comprehensive guide:
Identify your type of business, location, size, and nature of the business. These factors will influence the cost, legal requirements, and potential challenges of starting your business.
Choose and Register a Business Name
Register your business name with the Department of Trade and Industry (DTI). The registration fee ranges from PHP 200 to PHP 2,000, depending on the territorial scope of your business.
Apply for Barangay Clearance at the Barangay Hall where your business is located. It typically costs around PHP 500 but can vary depending on your barangay.
Business Permit or Mayor’s Permit
Obtain a Business Permit from your local city or municipal hall. The cost varies widely based on the size and nature of your business, but expect to budget around PHP 5,000.
Register with the Bureau of Internal Revenue (BIR) to obtain your TIN and pay the registration fee (PHP 500), Documentary Stamp Tax (PHP 15), and annual registration fee (PHP 500).
Other Government Registrations
Consider rent, equipment purchase, utilities, salaries (if you’re hiring employees), and marketing. These will vary significantly based on your specific business.
You may need to consult a lawyer or business consultant to ensure you comply with all laws and regulations. Budget for this accordingly.
Potential challenges include bureaucratic delays, navigating the complex tax system, and managing operational costs. To overcome these, consider hiring a local business consultant who understands the ins and outs of starting a business in the Philippines. They can help you navigate the process, avoid common pitfalls, and set your business up for success.
Remember, this guide provides a general overview. For more detailed advice tailored to your situation, consult a business consultant or legal professional in the Philippines.
Starting a sole proprietorship in the Philippines is a complex process that requires careful consideration. From understanding the legal obligations to budgeting for operational costs, setting up your business can be overwhelming if you need expert guidance. Consider speaking with a local business consultant or lawyer who understands the intricacies of starting and running a business in the Philippines. They can provide valuable insight and advice to help you keep your business running smoothly. With the proper guidance, starting a sole proprietorship in the Philippines is possible—and can be rewarding for years to come.
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